UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

 

[Ö]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2015

 

— OR —

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 333-100240

 

Oncor Electric Delivery Company LLC

(Exact name of registrant as specified in its charter)

 

 

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Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:    None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes___ No  √  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes   √     No      

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes        No   √   

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   √     No___

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  √  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ___ Accelerated filer ___   Non-Accelerated filer   √  (Do not check if smaller reporting company)

Smaller reporting company ___

 

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes __ No  √  

 

Aggregate market value of Oncor Electric Delivery Company LLC common membership interests held by non-affiliates: None

 

As of February 25, 2016,  80.03% of the outstanding membership interests in Oncor Electric Delivery Company LLC (Oncor) were directly held by Oncor Electric Delivery Holdings Company LLC and indirectly by Energy Future Holdings Corp., 19.75% of the outstanding membership interests were held by Texas Transmission Investment LLC and 0.22% of the outstanding membership interests were indirectly held by certain members of Oncor’s management and board of directors.  None of the membership interests are publicly traded.

 

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DOCUMENTS INCORPORATED BY REFERENCE - None

 

 

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Oncor Electric Delivery Company LLC’s (Oncor) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports are made available to the public, free of charge, on the Oncor website at http://www.oncor.com as soon as reasonably practicable after they have been filed with or furnished to the Securities and Exchange Commission.  The information on Oncor’s website or available by hyperlink from the website shall not be deemed a part of, or incorporated by reference into, this annual report on Form 10-K.  The representations and warranties contained in any agreement that we have filed as an exhibit to this annual report on Form 10-K or that we have or may publicly file in the future may contain representations and warranties made by and to the parties thereto as of specific dates.  Such representations and warranties may be subject to exceptions and qualifications contained in separate disclosure schedules, may represent the parties’ risk allocation in the particular transaction, or may be qualified by materiality standards that differ from what may be viewed as material for securities law purposes.

 

This annual report on Form 10-K and other Securities and Exchange Commission filings of Oncor and its subsidiary occasionally make references to Oncor (or “we,” “our,” “us” or “the company”) when describing actions, rights or obligations of its subsidiary.  These references reflect the fact that the subsidiary is consolidated with Oncor for financial reporting purposes.  However, these references should not be interpreted to imply that Oncor is actually undertaking the action or has the rights or obligations of its subsidiary or that the subsidiary company is undertaking an action or has the rights or obligations of its parent company or of any other affiliate.

 

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GLOSSARY

 

 

 

 

 

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PART I

 

Items 1. and 2.  BUSINESS AND PROPERTIES

 

References in this report to “we,” “our,” “us” and “the company” are to Oncor and or/its subsidiary as apparent in the context.  See “Glossary” on page 3 for definition of terms and abbreviations.

 

Overview of Oncor 

 

We are a regulated electricity transmission and distribution company that provides the essential service of delivering electricity safely, reliably and economically to end-use consumers through our electrical systems, as well as providing transmission grid connections to merchant generation facilities and interconnections to other transmission grids in Texas.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly beneficially own the remaining 0.22% of our outstanding membership interests.  We are a limited liability company organized under the laws of the State of Delaware, formed in 2007 as the successor entity to Oncor Electric Delivery Company, a corporation formed under the laws of the State of Texas in 2001.

 

We operate the largest transmission and distribution system in Texas, delivering electricity to more than 3.3 million homes and businesses and operating more than 121,000 miles of transmission and distribution lines.  We provide:

 

 

 

Our transmission and distribution rates are regulated by the PUCT, and in certain instances, by the FERC.  We are not a seller of electricity, nor do we purchase electricity for resale.  The company is managed as an integrated business; consequently, there are no reportable segments.

 

Our transmission and distribution assets are located principally in the north-central, eastern and western parts of Texas.  This territory has an estimated population in excess of ten million, about forty percent of the population of Texas, and comprises 91 counties and more than 400 incorporated municipalities, including Dallas/Fort Worth and surrounding suburbs, as well as Waco, Wichita Falls, Odessa, Midland, Tyler and Killeen.  Most of our power lines have been constructed over lands of others pursuant to easements or along public highways, streets and rights-of-way as permitted by law.  At December 31, 2015, we had approximately 3,520 full-time employees, including approximately 670 employees under collective bargaining agreements.

 

Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below.  Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, including TXU Energy and Luminant, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group.  We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.

 

 

 

 

 

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EFH Corp. Bankruptcy Proceedings

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH (EFH Debtors),  commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 to Financial Statements for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements.

 

Potential Change in Indirect Ownership of Oncor

 

As part of the EFH Bankruptcy Proceedings, on September 21, 2015, the EFH Debtors filed their fifth amended plan of reorganization (as such may be amended from time to time, Plan of Reorganization) and related amended disclosure statement (the Disclosure Statement).  Also on September 21, 2015, the bankruptcy court approved the Disclosure Statement and the EFH Debtors’ related Plan of Reorganization solicitation procedures.  The EFH Debtors solicited votes on the Plan of Reorganization and received significant support in favor of confirmation.  The EFH Debtors filed their sixth amended Plan of Reorganization on December 6, 2015 to address and resolve several issues raised by parties in interest and the bankruptcy court.  The bankruptcy court confirmed the EFH Debtors' sixth amended Plan of Reorganization by order dated December 9, 2015.  The EFH Debtors presently are seeking regulatory approvals for the transactions contemplated by the Plan of Reorganization, which approvals are conditions to the Plan of Reorganization effective date.  We cannot predict the outcome of these regulatory proceedings and whether the Plan of Reorganization will become effective.

 

In general, the Plan of Reorganization calls for a merger and investment structure that involves a tax-free deconsolidation of TCEH from EFH Corp., immediately followed by the acquisition of reorganized EFH Corp. financed by existing TCEH creditors and third party investors.  In this regard, the Plan of Reorganization provides for a series of transactions that would lead to a significant change in the indirect equity ownership of Oncor.  Under the terms of the Plan of Reorganization, on the effective date, acquisition entities (Purchasers) controlled by an investor group (collectively, the Investor Group) consisting of certain unsecured creditors of TCEH and an affiliate of Hunt Consolidated, Inc. (Hunt), as well as certain other investors designated by Hunt to acquire (EFH Acquisition) reorganized EFH Corp. (Reorganized EFH), would acquire pursuant to a merger and purchase agreement direct or indirect equity interests in Reorganized EFH and EFIH that indirectly represent all of the outstanding equity interests in Oncor Holdings and at least 80.03% of the outstanding equity interests in Oncor.  As part of the transactions contemplated by the merger and purchase agreement, among other things, the Investor Group intends to raise up to $12.6 billion of equity and debt financing to invest in Reorganized EFH, and a successor to Reorganized EFH will be converted to a real estate investment trust (REIT) under the Internal Revenue Code.

 

In addition, and in connection with the merger and purchase agreement referred to above, at the request of and with the consent of EFIH, we and Oncor Holdings entered into a letter agreement with the Purchasers.  The letter agreement sets forth certain rights and obligations of the Oncor entities and the Purchasers to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the EFH Acquisition and the other transactions described in the merger and purchase agreement.

 

The letter agreement is not intended to give the Purchasers, directly or indirectly, the right to control or direct the operations of any Oncor entity prior to the receipt of all approvals required by the PUCT and other governmental entities and the consummation of the EFH Acquisition and related transactions (if and when such transactions are consummated).  In addition, Oncor Holdings and Oncor have not endorsed or approved any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by the Purchasers involving Oncor Holdings or Oncor, and the parties acknowledge that further action will be required by Oncor Holdings and Oncor in order for any such restructuring or other transaction to be completed. 

 

In connection with the proposed EFH Acquisition, EFH Corp. has taken the position that, unless the Purchasers have otherwise acquired, or entered into a definitive agreement with Texas Transmission for the acquisition of the equity interest in Oncor held by Texas Transmission at the consummation of the EFH Acquisition, certain of EFH Corp.’s  rights contained in the Investor Rights Agreement (Investor Rights Agreement), dated November 2008 among Oncor and certain of its direct and indirect equity holders, including EFH Corp. and Texas Transmission, would require Texas Transmission to sell its equity interest in Oncor to the Purchasers in connection with the EFH Acquisition. In this regard, in October

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2015, EFH Corp. filed a complaint against Texas Transmission alleging breach of Texas Transmission’s obligations under the Investor Rights Agreement for failing to agree to sell its equity interest in Oncor in connection with the proposed EFH Acquisition. The Purchasers have intervened in the pending litigation. The parties are in the process of conducting discovery and engaging in other pretrial matters.  We cannot predict the outcome of this pending litigation between EFH Corp. and Texas Transmission relating to the Investor Rights Agreement and the impact of such litigation on the EFH Acquisition and related transactions.

 

As a general matter, although the Plan of Reorganization has been confirmed by the Bankruptcy Court, we cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the Plan of Reorganization will (or when they will) close. In addition, the transactions are subject to customary closing conditions, including receipt of all applicable regulatory approvals.  In this regard in September  2015, Oncor and the Purchasers filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Plan of Reorganization, and a ruling with respect to such application is expected by late March 2016.  Regulatory approvals with respect to those transactions were the subject of an application filed by Oncor and the Purchasers with FERC.  FERC issued an order conditionally approving the transactions on December 4, 2015. As indicated above, PUCT approval remains pending, and there can be no assurance if or when the required regulatory approval will be obtained or if the conditions to any such approval will be acceptable to the Purchasers. 

 

In addition, in connection with the EFH Bankruptcy Proceedings, the EFH Debtors and various creditor parties entered into a settlement agreement (the Settlement Agreement) in August 2015 (as amended in September 2015) to compromise and settle, among other things (a) intercompany claims among the EFH Debtors, (b) claims and causes of actions against holders of first lien claims against TCEH and the agents under the TCEH Senior Secured Facilities, (c) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (d) claims and causes of action against each of the EFH Debtors' current and former directors, the Sponsor Group, managers and officers and other related entities.  The Settlement Agreement contemplates a release of such claims upon approval of the Settlement Agreement by the Bankruptcy Court, which would remain in effect regardless of whether or not the EFH Acquisition is completed or the Plan of Reorganization becomes effective.  The Bankruptcy Court approved the Settlement Agreement in December 2015.

 

The Settlement Agreement settles substantially all inter-debtor claims through the effective date of the Settlement Agreement.  These settled claims include potentially contentious inter-debtor claims, including various potential avoidance actions and claims arising under numerous debt agreements, tax sharing agreements, and contested property transfers.  The release provisions of the Settlement Agreement took effect immediately upon the entry of the Bankruptcy Court order approving the Settlement Agreement and are not contingent upon either the Plan of Reorganization becoming effective or the closing of the EFH Acquisition.  Accordingly, substantially all of the potential affiliate claims, derivative claims and other types of disputes among affiliates (including claims against Oncor) have been resolved by bankruptcy court order.  Accordingly, we believe the Settlement Agreement resolves all affiliate claims against Oncor and its assets existing as of the effective date of the Settlement Agreement.

 

The EFH Bankruptcy Proceedings continue to be a complex litigation matter and the full extent of potential impacts on Oncor remains unknown.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.

 

Oncor’s Market (ERCOT statistics below were derived from information published by ERCOT)

 

We operate within the ERCOT market.  This market represents approximately 90% of the electricity consumption in Texas.  ERCOT is the regional reliability coordinating organization for member electricity systems in Texas and the Independent System Operator (ISO) of the interconnected transmission grid for those systems.  ERCOT is responsible for ensuring reliability, adequacy and security of the electric systems, as well as nondiscriminatory access to transmission service by all wholesale market participants in the ERCOT region.  ERCOT’s membership consists of more than 310 corporate and associate members, including electric cooperatives, municipal power agencies, independent generators, independent power marketers, transmission service providers, distribution services providers, independent REPs and consumers.

 

In 2015, ERCOT’s hourly demand peaked at 69,877 MW as compared to the peak hourly demand of 66,454 MW in 2014.  The ERCOT market has limited interconnections to other markets in the US and Mexico, which currently limits

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potential imports into and exports out of the ERCOT market to 1,106 MW of generation capacity (or approximately 2% of peak demand).  In addition, wholesale transactions within the ERCOT market are generally not subject to regulation by the FERC.

 

The ERCOT market operates under reliability standards set by NERC.  The PUCT has primary jurisdiction over the ERCOT market to ensure the adequacy and reliability of power supply across Texas’ main interconnected transmission grid.  We, along with other owners of transmission and distribution facilities in Texas, assist the ERCOT ISO in its operations.  We have planning, design, construction, operation and maintenance responsibility for the portion of the transmission grid and for the load-serving substations we own, primarily within our certificated distribution service area.  We participate with the ERCOT ISO and other ERCOT utilities in obtaining regulatory approvals and planning, designing, constructing and upgrading transmission lines in order to remove existing constraints and interconnect generation on the ERCOT transmission grid.  The transmission line projects are necessary to meet reliability needs, support energy production and increase bulk power transfer capability.

 

Oncor’s Strategies

 

We focus on delivering electricity in a safe and reliable manner, minimizing service interruptions and investing in our transmission and distribution infrastructure to maintain our system,  serve our growing customer base with a modernized grid and support energy production.

 

We believe that building and leveraging upon opportunities to scale our operating advantage and technology programs enables us to create value by eliminating duplicative costs, efficiently managing supply costs, and building and standardizing distinctive process expertise over a larger grid.  Scale also allows us to take part in large capital investments in our transmission and distribution system, with a smaller fraction of overall capital at risk and with an enhanced ability to streamline costs.  Our growth strategies are to invest in technology upgrades and to construct transmission and distribution facilities to meet the needs of the growing Texas market and support energy production.  We and other transmission and distribution businesses in ERCOT benefit from regulatory capital recovery mechanisms known as “capital trackers” that we believe enable adequate and more timely recovery of transmission, distribution and advanced metering investments through our regulated rates.

 

Oncor’s Operations

 

Performance — We achieved or exceeded market performance protocols in 12 out of 14 PUCT market metrics in 2015.  These metrics measure the success of transmission and distribution companies in facilitating customer transactions in the competitive Texas electricity market. 

 

Investing in Infrastructure and Technology — In 2015, we invested approximately $1.2 billion in our network to upgrade the transmission system and associated facilities, to extend the distribution infrastructure and to pursue certain initiatives in infrastructure maintenance and information technology.

 

Electricity Transmission — Our electricity transmission business is responsible for the safe and reliable operations of our transmission network and substations.  These responsibilities consist of the construction and maintenance of transmission facilities and substations and the monitoring, controlling and dispatching of high-voltage electricity over our transmission facilities in coordination with ERCOT.

 

We are a member of ERCOT, and our transmission business actively assists the operations of ERCOT and market participants.  Through our transmission business, we participate with ERCOT and other member utilities to plan, design, construct and operate new transmission lines, with regulatory approval, necessary to maintain reliability, interconnect to merchant generation facilities, increase bulk power transfer capability and minimize limitations and constraints on the ERCOT transmission grid.

 

Transmission revenues are provided under tariffs approved by either the PUCT or, to a small degree related to an interconnection to other markets, the FERC.  Network transmission revenues compensate us for delivery of electricity over transmission facilities operating at 60 kV and above.  Other services we offer through our transmission business include system impact studies, facilities studies, transformation service and maintenance of transformer equipment, substations and transmission lines owned by other parties.

 

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PURA allows us to update our transmission rates periodically to reflect changes in invested capital.  This “capital tracker” provision encourages investment in the transmission system to help ensure reliability and efficiency by allowing for timely recovery of and return on new transmission investments.

 

At December 31, 2015, our transmission facilities included 6,410 circuit miles of 345kV transmission lines and 9,536 circuit miles of 138kV and 69kV transmission lines.  Sixty-nine generation facilities totaling 36,991 MW were directly connected to our transmission system at December 31, 2015, and 298 transmission stations and 717 distribution substations were served from our transmission system.

 

At December 31, 2015, our transmission facilities had the following connections to other transmission grids in Texas:

 

 

 

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Electricity Distribution — Our electricity distribution business is responsible for the overall safe and efficient operation of distribution facilities, including electricity delivery, power quality and system reliability.  These responsibilities consist of the ownership, management, construction, maintenance and operation of the distribution system within our certificated service area.  Our distribution system receives electricity from the transmission system through substations and distributes electricity to end-users and wholesale customers through 3,237 distribution feeders.

 

Our distribution system included over 3.3 million points of delivery at December 31, 2015.  Over the past five years, the number of distribution system points of delivery we serve, excluding lighting sites, grew an average of 1.39% per year, adding approximately 49,200 points of delivery in 2015.

 

Our distribution system consists of 56,956 miles of overhead primary conductors, 21,323 miles of overhead secondary and street light conductors, 16,834 miles of underground primary conductors and 10,415 miles of underground secondary and street light conductors.  The majority of the distribution system operates at 25kV and 12.5kV.

 

Distribution revenues from residential and small business users are based on actual monthly consumption (kWh), and, depending on size and annual load factor, revenues from large commercial and industrial users are based either on actual monthly demand (kilowatts) or the greater of actual monthly demand (kilowatts) or 80% of peak monthly demand during the prior eleven months.

 

The PUCT allows utilities to file, under certain circumstances, up to four rate adjustments between rate reviews to recover distribution-related investments on an interim basis.    We have not filed any such distribution-related rate adjustments to date.

 

Customers — Our transmission customers consist of municipalities, electric cooperatives and other distribution companies.  Our distribution customers consist of approximately 80 REPs  (including  TXU Energy) and certain electric cooperatives in our certificated service area.  Revenues from TCEH represented 25% of our total operating revenues in 2015.  Revenues from REP subsidiaries of a nonaffiliated entity, NRG Energy, Inc., collectively represented 17% of our 

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total operating revenues in 2015.  No other customer represented more than 10% of our total operating revenues.  The consumers of the electricity we deliver are free to choose their electricity supplier from REPs who compete for their business.

 

Seasonality —  Our revenues and results of operations are subject to seasonality, weather conditions and other electricity usage drivers, with revenues being highest in the summer.

 

Regulation and Rates — As our operations are wholly within Texas, we believe we are not a public utility as defined in the Federal Power Act and, as a result, we are not subject to general regulation under this act.  However, we are subject to reliability standards adopted and enforced by the TRE and the NERC (including critical infrastructure protection) under the Federal Power Act.  See Item “1A. Risk Factors – We are subject to mandatory reliability standards and periodic audits of our compliance with those standards.  Efforts to comply with those standards could subject us to higher operating costs and/or increased capital expenditures, and non-compliance with applicable standards could subject us to penalties that could have a material effect on our business.”

 

The PUCT has original jurisdiction over transmission and distribution rates and services in unincorporated areas and in those municipalities that have ceded original jurisdiction to the PUCT and has exclusive appellate jurisdiction to review the rate and service orders and ordinances of municipalities.  Generally, PURA prohibits the collection of any rates or charges by a public utility (as defined by PURA) that does not have the prior approval of the appropriate regulatory authority (i.e., the PUCT or the municipality with original jurisdiction).

 

At the state level, PURA requires owners or operators of transmission facilities to provide open-access wholesale transmission services to third parties at rates and terms that are nondiscriminatory and comparable to the rates and terms of the utility’s own use of its system.  The PUCT has adopted rules implementing the state open-access requirements for all utilities that are subject to the PUCT’s jurisdiction over transmission services, including us.

 

Securitization Bonds —  Our consolidated financial statements include our wholly-owned, bankruptcy-remote financing subsidiary, Bondco.  This financing subsidiary was organized for the limited purpose of issuing certain transition bonds in 2003 and 2004.  Bondco issued $1.3 billion principal amount of transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.  At December 31, 2015, $41 million aggregate principal amount of transition bonds, maturing in 2016, was outstanding.

 

Environmental Regulations and Related Considerations —  The TCEQ and the EPA have jurisdiction over water discharges (including storm water) from facilities in Texas.  We believe our facilities are presently in material compliance with applicable state and federal requirements relating to discharge of pollutants into the water.  We believe we hold all required waste water discharge permits from the TCEQ for facilities in operation and have applied for or obtained necessary permits for facilities under construction.  We also believe we can satisfy the requirements necessary to obtain any required permits or renewals.  There are also federal rules pertaining to Spill Prevention, Control and Countermeasure (SPCC) plans for oil-filled electrical equipment and bulk storage facilities for oil that affect certain of our facilities.   We have implemented SPCC plans as required for those substations, work centers and distribution systems, and believe we are currently in material compliance with these rules.

 

Treatment, storage and disposal of solid waste and hazardous waste are regulated at the state level under the Texas Solid Waste Disposal Act and at the federal level under the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act.  The EPA has issued regulations under the Resource Conservation and Recovery Act of 1976 and the Toxic Substances Control Act, and the TCEQ has issued regulations under the Texas Solid Waste Disposal Act applicable to our facilities.  We are in material compliance with applicable solid and hazardous waste regulations.

 

Our capital expenditures for environmental matters totaled $14 million in 2015 and are expected to total approximately $12 million in 2016.

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Item 1A.   RISK FACTORS 

 

Some important factors in addition to others specifically addressed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” that could have a material negative impact on our operations, financial results and financial condition, or could cause our actual results or outcomes to differ materially from any projected outcome contained in any forward-looking statement in this report, include:

 

Our business is subject to ongoing complex governmental regulations and legislation that have impacted, and will continue in the future to impact, our business and/or results of operations.

 

Our business operates in a changing market environment influenced by various state and federal legislative and regulatory initiatives regarding the restructuring of the energy industry.  We will need to continually adapt to these changes.

 

Our business is subject to changes in state and federal laws (including PURA, the Federal Power Act, the Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 2005), changing governmental policy and regulatory actions (including a review of a change in control of Oncor in connection with resolution of the EFH Bankruptcy Proceedings by the PUCT, and also including generally by the NERC, the TRE, the TCEQ, the FERC and the EPA) and the rules, guidelines and protocols of ERCOT with respect to matters including, but not limited to, market structure and design, construction and operation of transmission and distribution facilities, acquisition, disposal, depreciation and amortization of regulated assets and facilities, recovery of costs and investments, return on invested capital and environmental matters.  Changes in, revisions to, or reinterpretations of existing laws and regulations and other regulatory actions may have an adverse effect on our business and we could be exposed to increased costs to comply with the more stringent requirements or new interpretations and to potential liability for customer refunds, penalties or other amounts.  If it is determined that we did not comply with applicable statutes, regulations, rules, tariffs or orders and we are ordered to pay a material amount in customer refunds, penalties or other amounts, our financial condition, results of operations and cash flow would be materially adversely affected.

 

For example, under the Energy Policy Act of 2005, the FERC can impose penalties (up to $1 million per day per violation) for failure to comply with mandatory electric reliability standards, including standards to protect the power system against potential disruptions from cyber and physical security breaches. In addition, the PUCT may impose penalties on us if it finds that we violated any law, regulation, PUCT order or other rule or requirement.  The PUCT has the authority to impose penalties of up to $25,000 per day per violation.

 

The Texas Legislature meets every two years.  The last Legislature regular session was from January 2015 to June 2015.  However, at any time the governor of Texas may convene a special session of the Legislature.  During any regular or special session bills may be introduced that, if adopted, could materially and adversely affect our business and our business prospects.

 

The rates of our electricity delivery business are subject to regulatory review and may be reduced below current levels, which could adversely impact our financial condition and results of operations.

 

The rates we charge are regulated by the PUCT and certain cities and are subject to cost-of-service regulation and annual earnings oversight.  This regulatory treatment does not provide any assurance as to achievement of earnings levels.  Our rates are regulated based on an analysis of our costs and capital structure, as reviewed and approved in a regulatory proceeding.  While rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the PUCT will judge all of our costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that our rates are based upon, or that the regulatory process in which rates are determined will always result in rates that will produce full recovery of our costs, including regulatory assets reported in the balance sheet, and the return on invested capital allowed by the PUCT.

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Attacks on our infrastructure or other events that disrupt or breach our cyber/data or physical security measures could have an adverse impact on our reputation, disrupt business operations and expose us to significant liabilities including penalties for failure to comply with federal, state or local statutes and regulations, which could have a material effect on our results of operations, liquidity and financial condition.

 

A breach of cyber/data security measures that impairs our information technology infrastructure could disrupt normal business operations and affect our ability to control our transmission and distribution assets, access customer information and limit communication with third parties.  While we have controls in place designed to protect our information technology infrastructure and have not had any significant breaches to date, any loss of confidential or proprietary data through a breach could adversely affect our reputation, expose us to material legal and regulatory claims, impair our ability to execute on business strategies and/or materially affect our results of operations, liquidity and financial condition.

 

A physical attack on our transmission and distribution infrastructure could also interfere with normal business operations and affect our ability to control our transmission and distribution assets. While we have security measures in place designed to protect our transmission and distribution system and have not had any significant security breaches, a physical security breach could adversely affect our reputation, expose us to material regulatory claims and/or materially affect our results of operations, liquidity and financial condition.

 

Under the Energy Policy Act of 2005, the FERC can impose penalties (up to $1 million per day per violation) for failure to comply with mandatory electric reliability standards, including standards to protect the power system against potential disruptions from cyber and physical security breaches.

 

We participate in industry groups and discussions with regulators to remain current on emerging threats and mitigating techniques.  These groups include, but are not limited to: the US Cyber Emergency Response Team, the National Electric Sector Cyber Security Organization, the Department of Homeland Security, the US Nuclear Regulatory Commission and NERC.  We also apply the knowledge gained by continuing to invest in technology, processes, security measures and services to detect, mitigate and protect our assets, both physical and cyber.  These investments include upgrades to network architecture and physical security measures, regular intrusion detection monitoring and compliance with emerging industry regulation.

 

Our capital deployment program may not be executed as planned, which could adversely impact our financial condition and results of operations.

 

There can be no guarantee that the execution of our capital deployment program for our electricity delivery facilities will be successful, and there can be no assurance that the capital investments we intend to make in connection with our electricity delivery business will produce the desired reductions in cost and improvements to service and reliability.  Furthermore, there can be no guarantee that our capital investments will ultimately be recoverable through rates or, if recovered, that they will be recovered on a timely basis.  For more information regarding the limitation on recovering the value of investments using rates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Key Risks and Challenges” and “– Regulation and Rates.”

 

Market volatility may impact our business and financial condition in ways that we currently cannot predict.

 

Because our operations are capital intensive, we expect to rely over the long-term upon access to financial markets as a significant source of liquidity for capital requirements not satisfied by cash-on-hand, operating cash flows or our revolving credit facility.  Considering our construction plans to service our growing customer base and ERCOT needs, it is likely we will incur additional debt.  In addition, we may incur additional debt in connection with other investments in infrastructure or technology, such as smart grid systems.  Our ability to access the capital or credit markets may be severely restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions.  In addition, the cost of debt financing may be materially and adversely impacted by these market conditions.  Even if we are able to obtain debt financing, we may be unable to recover in rates some or all of the costs of such debt financing if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.  Accordingly, there can be no assurance that the capital and credit markets will continue to be a reliable or acceptable source of short-term or long-term financing for us.  Additionally, disruptions in the capital and credit markets could have a broader impact on the economy in general in ways that could lead to reduced electricity usage, which could have a negative impact on our revenues, or have an impact on our customers, counterparties and/or lenders, causing them to fail to meet their obligations to us.

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Adverse actions with respect to our credit ratings could negatively affect our ability to access capital.

 

Our access to capital markets and our cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  Our credit ratings are currently substantially higher than those of EFH Corp., our majority equity investor.  If credit rating agencies were to change their views of our independence from EFH Corp., our credit ratings would likely decline.  Despite our ring-fencing measures, rating agencies have in the past taken, and could in the future take, an adverse action with respect to our credit ratings in response to financing and liability management activities by, or restructuring transactions involving EFH Corp. and other members of the Texas Holdings Group.  Further, it is unclear how the progress of the EFH Bankruptcy Proceedings and the consummation of the EFH Acquisition and change in indirect ownership of Oncor proposed in such proceedings may affect our credit ratings.  In the event any action in connection with the EFH Bankruptcy Proceedings and the consummation of the EFH Acquisition and change in indirect ownership of Oncor proposed in such proceeding causes our borrowing costs to increase, we may not be able to recover such increased costs if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.

 

Most of our large suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with us. If our credit ratings decline, the costs to operate our business could increase because counterparties could require the posting of collateral in the form of cash-related instruments, or counterparties could decline to do business with us.

 

We are subject to mandatory reliability standards and periodic audits of our compliance with those standards.  Efforts to comply with those standards could subject us to higher operating costs and/or increased capital expenditures, and non-compliance with applicable standards could subject us to penalties that could have a material effect on our business.

 

The FERC has jurisdiction with respect to ensuring the reliability of electric transmission service, including transmission facilities owned by utilities within ERCOT.  The FERC has designated the NERC to establish and enforce reliability standards, under FERC oversight, for all owners, operators and users of the bulk power system.  The FERC has approved the delegation by NERC of compliance and enforcement authority for reliability in the ERCOT region to the TRE.  To maintain compliance with the mandatory reliability standards, we may be subjected to higher operating costs and/or increased capital expenditures.  While we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the PUCT will approve full recovery of such costs or the timing of any such recovery.  In addition, if we were to be found to be in noncompliance with applicable reliability standards, we could be subject to sanctions, including monetary penalties.  Under the Energy Policy Act of 2005, FERC can impose penalties (up to $1 million per day per violation) for failure to comply with reliability standards, which would not be recoverable from customers through regulated rates.  We have four registrations with NERC – as a transmission planner, a transmission owner, a transmission operator and distribution provider.  As a registered entity, we are subject to periodic audits by the TRE of our compliance with reliability standards.  These audits will occur as designated by the TRE at a minimum of every three years.  We cannot predict the outcome of any such audits.

 

Our revenues are concentrated in a small number of customers, including TCEH, and any delay or default in payment could adversely affect our cash flows, financial condition and results of operations.

 

Our revenues from the distribution of electricity are collected from approximately 80 REPs (including TXU Energy) and certain electric cooperatives in our certificated service area, that sell the electricity we distribute to consumers.  Revenues from TCEH represented 25% of our total operating revenues for the year ended December 31, 2015.  Revenues from REP subsidiaries of a non-affiliated entity, NRG Energy, Inc., collectively represented 17% of our total operating revenues for the year ended December 31, 2015.  Adverse economic conditions, structural problems in the market served by ERCOT, the EFH Bankruptcy Proceedings involving TCEH, or the financial difficulties of one or more other REPs could impair the ability of these REPs to pay for our services or could cause them to delay such payments.  We depend on these REPs to timely remit these revenues to us.  We could experience delays or defaults in payment from these REPs, which could adversely affect our cash flows, financial condition and results of operations.  Due to commitments made to the PUCT in 2007, we are not allowed to recover bad debt expense, or certain other costs and expenses, from rate payers in the event of a default or bankruptcy by an affiliate REP.

 

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In the future, we could have liquidity needs that could be difficult to satisfy under some circumstances, especially in uncertain financial market conditions.

 

Our operations are capital intensive.  We rely on access to financial markets and our revolving credit facility as a significant source of liquidity for capital requirements, including maturities of long-term debt, not satisfied by cash-on-hand or operating cash flows.  The inability to raise capital on favorable terms or access liquidity facilities, particularly during times of uncertainty similar to those experienced in the financial markets in 2008 and 2009, could adversely impact our ability to sustain and grow our business and would likely increase capital costs that may not be recoverable through rates.  Our access to the financial markets and our revolving credit facility, and the pricing and terms we receive in the financial markets, could be adversely impacted by various factors, such as:

 

 

Our primary source of liquidity aside from operating cash flows is our ability to borrow under our revolving credit facility.  The revolving credit facility contains a debt-to-capital ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2015, we were in compliance with such covenant.  See Note 6 to Financial Statements for further information regarding this covenant.  The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At December 31, 2015, the available bond credits were approximately $2.577 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $1.261 billion.  In 2007, we committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At December 31, 2015, our regulatory capitalization ratio was 59.8% debt and 40.2% equity.  Our ability to incur additional long-term debt will be limited by our regulatory capital structure.

 

The costs of providing pension and OPEB and related funding requirements may have a material adverse effect on our financial condition, results of operations and cash flows.

 

We offer certain pension and health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees through pension and OPEB plans.  Previously, some of these benefits were provided through participation with EFH Corp. and certain other subsidiaries of EFH Corp. in joint plans.

 

In 2012, we entered into an agreement with EFH Corp. to assume primary responsibility for pension benefits of certain participants for whom EFH Corp. bore primary funding responsibility (a closed group of retired and terminated vested plan participants not related to our regulated utility business).  As the Oncor Retirement Plan received an amount of plan assets equal to the liabilities we assumed for those participants, execution of the agreement did not have a material impact on our reported results of operations or financial condition in 2012.  However, there can be no guarantee that such assumption will not have an impact on our results of operations or financial condition in the future.

 

Our costs or share of the costs of providing pension and OPEB benefits and related funding requirements are dependent upon numerous factors, assumptions and estimates and are subject to changes in these factors, assumptions and

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estimates, including the market value of the assets funding the pension and OPEB plans.  Benefits costs and related funding requirements are also subject to changing employee demographics (including but not limited to age, compensation levels and years of accredited service), the level of contributions made to retiree plans, expected and actual earnings on plan assets and the discount rates used in determining the projected benefit obligation.  Changes made to the provisions of the plans may also impact current and future benefit costs.  Fluctuations in actual market returns as well as changes in general interest rates may result in increased or decreased benefit costs in future periods.

 

If EFH Corp., which is in bankruptcy, is unable to make contributions to the defined benefit pension plan sponsored by EFH Corp., in which Oncor participates (EFH Retirement Plan), while it is a member of our controlled group within the meaning of ERISA, we could be liable under ERISA for such contributions as well as any unfunded pension plan liability that EFH Corp. is unable to pay.  EFH Corp.’s portion of the EFH Retirement Plan’s unfunded pension liability is $22 million at December 31, 2015.  EFH Corp.’s contributions for the EFH Retirement Plan are expected to total approximately zero in 2016 and $12 million in the 2016 to 2020 period.

 

See Note 10 to Financial Statements, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Application of Critical Accounting Policies –  Defined Benefit Pension Plans and OPEB Plan” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Pension and OPEB Plans Funding” for further information regarding pension and OPEB funding.

 

Our ring-fencing measures may not work as planned and a bankruptcy court may nevertheless subject Oncor to the claims of its affiliates’ creditors.

 

As discussed above, to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality, various legal, financial and contractual provisions were implemented.  These enhancements are intended to minimize the risk that a court would order any of the Oncor Ring-Fenced Entities’ assets and liabilities to be substantively consolidated with those of any member of the Texas Holdings Group in connection with a bankruptcy case involving one or more members of the Texas Holdings Group.  Substantive consolidation is an equitable remedy in bankruptcy that results in the pooling of the assets and liabilities of the debtor and one or more of its affiliates solely for purposes of the bankruptcy case, including for purposes of distributions to creditors and voting on and treatment under a reorganization plan.  Bankruptcy courts have broad equitable powers, and as a result, outcomes in bankruptcy proceedings are inherently difficult to predict. To the extent a bankruptcy court were to determine that substantive consolidation is appropriate under the facts and circumstances, then the assets and liabilities of any Oncor Ring-Fenced Entity that is subject to the substantive consolidation order would be available to help satisfy the debt or contractual obligations of the Texas Holdings Group entity that is a debtor in bankruptcy and subject to the same substantive consolidation order.  If any Oncor Ring-Fenced Entity were included in such a substantive consolidation order, the secured creditors of Oncor would retain their liens and priority with respect to Oncor’s assets.

 

In the EFH Bankruptcy Proceedings, there can be no assurance that the US bankruptcy court will not order an Oncor Ring-Fenced Entity’s assets and liabilities to be substantively consolidated with the members of the Texas Holdings Group involved in the EFH Bankruptcy Proceedings or that the EFH Bankruptcy Proceedings will not result in a disruption of services we receive from, or jointly with, our affiliates.  See Note 1 to Financial Statements for additional information on our ring fencing measures.

 

Our rights under certain agreements with EFH Corp. and other members of the Texas Holdings Group could be adversely affected in connection with the EFH Bankruptcy  Proceedings.

 

We are party to various contracts and unexpired leases with EFH Corp. and other members of the Texas Holdings Group, as described in Note 12 to Financial Statements.  The US Bankruptcy Code permits a debtor in bankruptcy to assume (accept) or reject executory contracts and unexpired leases.  If members of the Texas Holdings Group,  who are debtors in the EFH Bankruptcy Proceedings, were to reject some or all of their executory contracts and unexpired leases with us in connection with the EFH Bankruptcy Proceedings, our results of operations and financial condition could be adversely affected.

 

Goodwill that we have recorded is subject to at least annual impairment evaluations, and as a result, we could be required to write off some or all of this goodwill, which may adversely impact our financial condition and results of operations.

 

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In accordance with accounting standards, recorded goodwill is not amortized but is reviewed annually or more frequently for impairment, if certain conditions exist, and may be impaired.  Any reduction in or impairment of the value of goodwill will result in a charge against earnings, which could cause a material adverse impact on our reported results of operations and financial condition.  See Note 1 to Financial Statements for goodwill impairment assessment and testing.

 

Our results of operations and financial condition could be negatively impacted by any development or event beyond our control that causes economic weakness in the ERCOT market.

 

We derive substantially all of our revenues from operations in the ERCOT market, which covers approximately 75% of the geographical area in the State of Texas.  As a result, regardless of the state of the economy in areas outside the ERCOT market, economic weakness in the ERCOT market could lead to reduced demand for electricity in the ERCOT market.  Such a reduction could have a material negative impact on our results of operations and financial condition.

 

Disruptions at power generation facilities owned by third parties could interrupt our sales of transmission and distribution services.

 

The electricity we transmit and distribute to customers of REPs is obtained by the REPs from electricity generation facilities.  We do not own or operate any generation facilities.  If generation is disrupted or if generation capacity is inadequate, our sales of transmission and distribution services may be diminished or interrupted, and our results of operations, financial condition and cash flows may be adversely affected.

 

The operation and maintenance of electricity delivery facilities involves significant risks that could adversely affect our results of operations and financial condition.

 

The operation and maintenance of delivery facilities involves many risks, including equipment breakdown or failure of facilities, lack of sufficient capital to maintain the facilities, impact of unusual or adverse weather conditions or other natural events, as well as the risk of performance below expected levels of efficiency or reliability, the occurrence of any of which could result in lost revenues and/or increased expenses that may not be recoverable through rates.  A significant number of our facilities were constructed many years ago.  In particular, older transmission and distribution equipment, even if maintained in accordance with good engineering practices, may require significant capital expenditures to keep operating at peak efficiency or reliability.  The risk of increased maintenance and capital expenditures arises from damage to facilities due to storms, natural disasters, wars, terrorist acts and other catastrophic events.  Further, our ability to successfully and timely complete capital improvements to existing facilities or other capital projects is contingent upon many variables and subject to substantial risks.  Should any such efforts be unsuccessful, we could be subject to additional costs that may not be recoverable through rates and/or the write-off of our investment in the project or improvement.

 

Insurance, warranties or performance guarantees may not cover all or any of the lost revenues or increased expenses that could result from the risks discussed above.  Likewise, our ability to obtain insurance, and the cost of and coverage provided by such insurance, could be affected by events outside our control.

 

Changes in technology or increased conservation efforts may reduce the value of our electricity delivery facilities and may significantly impact our business in other ways as well.

 

Research and development activities are ongoing to improve existing and alternative technologies to produce and store electricity, including gas turbines, fuel cells, microturbines, photovoltaic (solar) cells and concentrated solar thermal devices and batteries.  It is possible that advances in these or other technologies will reduce the costs of electricity production from these technologies to a level that will enable these technologies to compete effectively with traditional generation plants.  Changes in technology could also alter the channels through which retail customers buy electricity.  To the extent self-generation or storage facilities become a more cost-effective option for certain customers, our revenues could be materially reduced.

 

Also, electricity demand could be reduced by increased conservation efforts and advances in technology, which could likewise significantly reduce the value of our electricity delivery facilities.  Certain regulatory and legislative bodies have introduced or are considering requirements and/or incentives to reduce energy consumption by a fixed date.  Effective energy conservation by our customers could result in reduced energy demand, or significantly slow the growth in demand.  Such reduction in demand could materially reduce our revenues.  Furthermore, we may incur increased capital expenditures if we are required to invest in conservation measures.

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We are dependent upon a limited number of suppliers and service providers for certain of our operations. If any of these suppliers or service providers failed or became unable to perform on their agreements with us, it could disrupt our business and have an adverse effect on our cash flows, financial condition and results of operations.

 

We rely on suppliers and service providers to provide us with certain specialized materials and services, including materials and services for power line maintenance, repair and construction, our AMS, information technology and customer operations.  The financial condition of our suppliers and service providers may be adversely affected by general economic conditions, such as credit risk and the turbulent macroeconomic environment in recent years. Because many of the tasks of these suppliers and service providers require specialized electric industry knowledge and equipment, if any of these parties fail to perform, go out of business or otherwise become unable to perform, we may not be able to transition to substitute suppliers or service providers in a timely manner. This could delay our construction and improvement projects, increase our costs and disrupt our operations, which could negatively impact our business and reputation. In addition, we could be subject to fines or penalties in the event a delay resulted in a violation of a PUCT or other regulatory order.

 

Our revenues and results of operations are seasonal.

 

A significant portion of our revenues is derived from rates that we collect from REPs based on the amount of electricity we distribute on behalf of such REPs.  Sales of electricity to residential and commercial customers are influenced by temperature fluctuations.  Thus, our revenues and results of operations are subject to seasonality, weather conditions and other electricity usage drivers, with revenues being highest in the summer.

 

The litigation environment in which we operate poses a significant risk to our business.

 

We are involved in the ordinary course of business in a number of lawsuits involving employment, commercial and environmental issues and other claims for injuries and damages, among other matters.  Judges and juries in the State of Texas have demonstrated a willingness to grant large verdicts, including punitive damages, to plaintiffs in personal injury, property damage and business tort cases.  We use appropriate means to contest litigation threatened or filed against us, but the litigation environment in the State of Texas poses a significant business risk.

 

The loss of the services of our key management and personnel could adversely affect our ability to operate our business.

 

Our future success will depend on our ability to continue to attract and retain highly qualified personnel. We compete for such personnel with many other companies, in and outside our industry, government entities and other organizations.  We may not be successful in retaining our current personnel or in hiring or retaining qualified personnel in the future.  Our failure to attract new personnel or retain our existing personnel could have a material adverse effect on our business.

 

Item 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

Item 3.LEGAL PROCEEDINGS

 

We are involved in various legal and administrative proceedings in the normal course of business the ultimate resolution of which, in the opinion of management, should not have a material effect on our financial position, results of operations or cash flows.   See Notes 3 and 8 to Financial Statements for additional information concerning our legal and regulatory proceedings.

 

Item 4.MINE SAFETY DISCLOSURES

 

Not applicable.

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PART II

 

Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED EQUITY HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

At December 31, 2015, 80.03% of our outstanding membership interests was held by Oncor Holdings and indirectly held by EFH Corp., 19.75% was held by Texas Transmission and 0.22% was indirectly held by certain members of our management team and board of directors through Investment LLC.  None of the membership interests are publicly traded, and none were issued in 2015.

 

See Note 9 to Financial Statements for a description of cash distributions we paid to our members and the restrictions on our ability to pay such distributions.

 

Item 6.SELECTED FINANCIAL DATA

 

 

 

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Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 2015, 2014 and 2013 should be read in conjunction with Selected Financial Data and our audited consolidated financial statements and the notes to those statements.

 

All dollar amounts in the tables in the following discussion and analysis are stated in millions of US dollars unless otherwise indicated.

 

BUSINESS

 

We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell power in the north-central, eastern and western parts of Texas.  Revenues from TCEH represented 25%, 25% and 27% of our total operating revenues for the years ended December 31, 2015, 2014 and 2013, respectively.  We are a majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  Oncor Holdings owns 80.03% of our outstanding membership interests, Texas Transmission owns 19.75% of our outstanding membership interests and certain members of our management team and board of directors indirectly own the remaining 0.22% of the outstanding membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.

 

Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below.  Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, including TXU Energy and Luminant, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group.  We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.

 

Significant Activities and Events

 

EFH Bankruptcy Proceedings — On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 to Financial Statements for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements and a discussion of the proposed change in ownership of Oncor in connection with such proceedings.

 

The US Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations.  Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of the EFH Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  Since that time, we have collected $127 million of the prepetition amount.  We estimate any potential pre-tax loss resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates has not been established as of December 31, 2015.

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The EFH Bankruptcy Proceedings are a complex litigation matter and the full extent of potential exposure at this time is unknown.  In general, the Plan of Reorganization provides for a series of transactions that would lead to a significant change in the indirect equity ownership of Oncor if the Plan of Reorganization is approved by the creditors of the EFH Debtors and confirmed by the bankruptcy court.  In this regard, on September 29, 2015, Oncor and the Purchasers filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Plan of Reorganization and a ruling with respect to such application is expected by late March 2016.  Regulatory approvals with respect to those transactions were the subject of an application filed by Oncor and the Purchasers with FERC.  FERC issued an order conditionally approving the transactions on December 4, 2015.  As indicated above, PUCT approval remains pending, and there can be no assurance if or when the required regulatory approval will be obtained or if the conditions to any such approvals will be acceptable to the Purchasers.  In addition, we will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows. See Notes 2 and 8 to Financial Statements and “Item 7. Quantitative and Qualitative Disclosures About Market Risk” for additional information.

 

Debt-Related Activities — See Note 7 to Financial Statements for information regarding repayments of long-term debt and the issuance of $725 million aggregate principal amount of senior secured notes in March 2015.  

 

Matters with the PUCT — See discussion of these matters below under “Regulation and Rates.”

 

KEY RISKS AND CHALLENGES

 

Following is a discussion of key risks and challenges facing management and the initiatives currently underway to manage such challenges.  For additional information concerning risk factors related to our business, see “Item1A. Risk Factors” in this report.

 

Rates and Cost Recovery

 

Our rates are regulated by the PUCT and certain cities and are subject to regulatory rate-setting processes and annual earnings oversight.  This regulatory treatment does not provide any assurance as to achievement of earnings levels.  Our rates are regulated based on an analysis of our costs and capital structure, as reviewed and approved in a regulatory proceeding.  Rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital.  However, there is no assurance that the PUCT will judge all of our costs to have been prudently incurred, that the PUCT will not reduce the amount of invested capital included in the capital structure that our rates are based upon, that the regulatory process in which rates are determined will always result in rates that produce full recovery of our costs or that our authorized return on equity will not be reduced.  See “Regulation and Rates” below for further information, including a discussion of our 2008 rate review.

 

EFH Bankruptcy Proceedings

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  See “Significant Activities and Events” above, “Item 1A. Risk Factors” and Notes 2, 8 and 12 to Financial Statements for a discussion of risks relating to, and potential impacts of, the EFH Bankruptcy Proceedings.

Capital Availability and Cost

 

Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  Our credit ratings are currently substantially higher than those of the Texas Holdings Group.  If credit rating agencies were to change their views of our independence from any member of the Texas Holdings Group, our credit ratings would likely decline.  We believe this risk is substantially mitigated by the ring-fencing measures as described in Note 1 to Financial Statements.    It is unclear how the progress of the EFH Bankruptcy Proceedings and the consummation of the EFH Acquisition and change in ownership of Oncor proposed in such proceedings may affect our credit ratings.    See “Item 1A. Risk Factors - Adverse actions with respect to our credit ratings could negatively affect our

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ability to access capital, and In the future, we could have liquidity needs that could be difficult to satisfy under some circumstances, especially in uncertain financial market conditions.”

 

Technology Initiatives

 

Risks to our technology initiative programs include nonperformance by equipment and service providers, failure of the technology to meet performance expectations and inadequate cost recovery allowances by regulatory authorities.  We are implementing measures to mitigate these risks, but there can be no assurance that these technology initiatives will achieve the operational and financial objectives.

 

Cyber Security and Infrastructure Protection Risk

 

A breach of our cyber/data or physical security measures that impairs our information technology infrastructure or transmission and distribution infrastructure could disrupt normal business operations, affect our ability to control our transmission and distribution system, expose us to material regulatory claims and limit communication with third parties.  Any loss of confidential or proprietary data through a cyber/data breach could also materially affect our reputation, expose the company to legal claims or impair our ability to execute on business strategies.  We participate in industry groups and with regulators to remain current on emerging threats and mitigating techniques.  While we have not experienced any security breach with a significant operational, reputational or financial impact, we recognize the growing threat within our industry and are proactively taking steps to continuously improve our technology, security measures, processes and services to detect, mitigate and protect our assets, both physical and cyber.

 

APPLICATION OF CRITICAL ACCOUNTING POLICIES

 

Our significant accounting policies are discussed in Note 1 to Financial Statements.  We follow accounting principles generally accepted in the US.  Application of these accounting policies in the preparation of our consolidated financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and revenues and expenses during the periods covered.  The following is a summary of certain critical accounting policies that are impacted by judgments and uncertainties and under which different amounts might be reported using different assumptions or estimation methodologies.

 

Revenue Recognition

 

Revenue includes an estimate for electricity delivery services provided from the billed meter reading date to the end of the period (unbilled revenue).  For electricity delivery services billed on the basis of kWh volumes, unbilled revenue is based on data collected through our AMS.    For other electricity delivery services, unbilled revenue is based on average daily revenues for the most recent period applied to the number of unmetered days through the end of the period.  

 

Accounting for the Effects of Income Taxes

 

Our tax sharing agreement with Oncor Holdings and EFH Corp. was amended in November 2008 to include Texas Transmission and Investment LLC.  The tax sharing agreement provides for the calculation of amounts related to income taxes for each of Oncor Holdings and Oncor substantially as if these entities were taxed as corporations and requires payments to the members determined on that basis (without duplication for any income taxes paid by a subsidiary of Oncor Holdings).

 

We became a partnership for US federal income tax purposes effective with the equity sale to Texas Transmission and Investment LLC in November 2008.  Accordingly, while partnerships are not subject to income taxes, in consideration of the tax sharing agreement and the presentation of our financial statements as an entity subject to cost-based regulatory rate-setting processes, with such costs historically including income taxes, the financial statements present amounts determined under the tax sharing agreement as “provision in lieu of income taxes” and “liability in lieu of deferred income taxes” for periods subsequent to the equity sale.  Such amounts are determined in accordance with the provisions of the accounting guidance for income taxes and accounting standards that provide interpretive guidance for accounting for uncertain tax positions and thus differences between the book and tax bases of assets and liabilities are accounted for as if we were a stand-alone corporation.  The accounting guidance for rate-regulated enterprises requires the recognition of regulatory assets or liabilities if it is probable such deferred tax amounts will be recovered from, or returned to customers in future rates.

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Our expense amounts related to income taxes and related balance sheet amounts are recorded pursuant to our tax sharing agreement as discussed above.  Recording of such amounts involves significant management estimates and judgments, including judgments and estimates of the timing and probability of recognition of income and deductions by taxing authorities.  In assessing the likelihood of realization of assets related to income taxes, management considers estimates of the amount and character of future taxable income.  Actual amounts related to income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, our forecasted financial condition and results of operations in future periods, as well as final review of filed tax returns by taxing authorities.  Our and EFH Corp.’s income tax returns are regularly subject to examination by applicable tax authorities.  In management’s opinion, the liability recorded pursuant to income tax accounting guidance related to uncertain tax positions reflects future amounts that may be owed as a result of any examination.

 

Amounts payable to and receivable from members related to income taxes on our balance sheet reflect our tax provision net of quarterly estimated tax payments required by the tax sharing agreement that are trued up the following year when the annual tax return is filed.  The $136 million and $180 million amounts receivable from members related to income taxes at December 31, 2015 and 2014, respectively, are primarily the result of the enactment of the Protecting Americans from Tax Hikes Act of 2015 and the Tax Increase Prevention Act of 2014.  Both bills were enacted late in December of each year after the fourth quarter estimated income tax payment had been made and each allows for 50% bonus depreciation on certain assets placed into service retroactive to January 1 of their respective years.    

 

See Notes 1 and 4 to Financial Statements.

 

Regulatory Assets and Liabilities

 

Our financial statements at December 31, 2015 and 2014 reflect net regulatory assets of $1.194 billion and $1.429 billion, respectively.  These amounts include $10 million and $108 million, respectively, of generation-related net regulatory assets recoverable by transition bonds as discussed immediately below.  Rate regulation is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital.  Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates.  See Note 5 to Financial Statements for more information regarding regulatory assets and liabilities.

 

Generation-related regulatory asset stranded costs arising prior to the Texas Electric Choice Plan (the 1999 legislation that restructured the electric utility industry in Texas to provide for retail competition) became subject to recovery through issuance of $1.3 billion principal amount of transition bonds in accordance with a regulatory financing order.  The carrying value of the regulatory asset upon final issuance of the bonds in 2004 represented the projected future cash flows to be recovered from REPs by us through revenues as a transition charge to service the principal and fixed rate interest on the bonds.  The regulatory asset is being amortized to expense in an amount equal to the transition charge revenues being recognized. The 2003 Series transition bonds matured in 2015 and were paid in full. The 2004 Series transition bonds with an outstanding balance of $41 million at December 31, 2015 mature in May 2016.

 

We believe our net regulatory assets are probable of recovery based on PURA and/or the PUCT’s orders, precedents or Substantive Rules.  Amounts are subject to PUCT review for reasonableness and prudence and possible disallowance.

 

Impairment of Long-Lived Assets and Goodwill

 

We evaluate long-lived assets (including intangible assets with finite lives) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

We also evaluate goodwill for impairment annually (at December 1) and whenever events or changes in circumstances indicate that an impairment may exist.  The determination of the existence of these and other indications of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows.

 

If at the assessment date our carrying value exceeds our estimated fair value (enterprise value), then the estimated enterprise value is compared to the estimated fair values of our operating assets (including identifiable intangible assets) and liabilities at the assessment date.  The resultant implied goodwill amount is compared to the recorded goodwill

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amount.  Any excess of the recorded goodwill amount over the implied goodwill amount is written off as an impairment charge.

 

In December 2015 and 2014, we concluded, based on a qualitative assessment, that our estimated enterprise fair value was more likely than not greater than our carrying value.  As a result, no additional testing for impairment was required.  Testing performed in December 2013 was based on the quantitative method and determined that our estimated enterprise fair value was in excess of the net carrying value of our operating assets and liabilities, resulting in no additional testing.  Accordingly, no impairments were recognized in 2015, 2014 or 2013.

 

Defined Benefit Pension Plans and OPEB Plan

 

We offer certain pension, health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees.  Until July 1, 2014, we also participated with EFH Corp. and other subsidiaries of EFH Corp. to offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees (EFH OPEB Plan).  Effective July 1, 2014, we ceased participation in the EFH OPEB Plan and established our own OPEB plan for our eligible retirees, certain eligible retirees of EFH Corp. for whom we have OPEB liability with respect to their regulated service, and their eligible dependents (Oncor OPEB Plan).  This move to the Oncor OPEB Plan has not had, and is not expected to have a material effect on our net assets or cash flows.  Reported costs of providing noncontributory pension and OPEB benefits are dependent upon numerous factors, assumptions and estimates.

 

PURA provides for our recovery of pension and OPEB costs applicable to services of our active and retired employees, as well as services of other EFH Corp. active and retired employees prior to the deregulation and disaggregation of EFH Corp.’s electric utility businesses effective January 1, 2002 (recoverable service).  Accordingly, we entered into an agreement with EFH Corp. whereby we assumed responsibility for applicable pension and OPEB costs related to those personnel’s recoverable service.

 

We are authorized to establish a regulatory asset or liability for the difference between the amounts of pension and OPEB costs reflected in our PUCT-approved billing rates and the actual amounts that would otherwise have been recorded as charges or credits to earnings related to recoverable service.  Accordingly, we defer (principally as a regulatory asset or property) additional pension and OPEB costs consistent with PURA.  Amounts deferred are ultimately subject to regulatory approval. 

 

We have also assumed primary responsibility for pension benefits of a closed group of retired and terminated vested plan participants not related to our regulated utility business (non-recoverable service) in a 2012 transaction. Any retirement costs associated with non-recoverable service is not recoverable through rates. Any retirement costs associated with non-recoverable service are recognized in other deductions or comprehensive income.

 

Benefit costs are impacted by actual and actuarial estimates of employee demographics (including but not limited to age, compensation levels and years of accredited service), future health care costs, the level of contributions made to retiree plans, expected and actual earnings on plan assets and the discount rates used in determining the projected benefit obligation.  Actuarial assumptions are reviewed and updated annually based on current economic conditions and trends.  Changes made to the provisions of the plans may also impact current and future benefit costs.  Fluctuations in actual equity market returns as well as changes in general interest rates may result in increased or decreased benefit costs in future periods.

 

In 2015, the pension plans experienced an actuarial gain of $181 million due primarily to changes in two key assumptions.  Pension plans gains were primarily impacted by an increase in the discount rate to 4.30% from 3.96% and the adoption of a new mortality table that shortens expected life spans.  Actual returns on pension plan assets in 2015 were less than the expected return on assets by $218 million creating an offsetting actuarial loss.  We expect the pension plans estimated amortizations of net actuarial losses to decrease by $22 million in 2016 reflecting these changes. 

 

In 2014, the projected benefit obligations of the employee benefit plans increased significantly due primarily to changes in several key assumptions.  These changes resulted in actuarial losses of $515 million and $128 million to the pension plans and OPEB plan, respectively.  Pension plans losses were primarily impacted by a reduction in the discount rate to 3.96% from 4.74%, (approximately $309 million) and the adoption of a new mortality table that extends expected life spans (approximately $198 million).  OPEB plan losses were primarily impacted by a reduction in the discount rate to

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4.23% from 4.98% (approximately $104 million) and the adoption of a new mortality rates table that extends expected life spans (approximately $101 million), partially offset by actuarial gains resulting from changes in demographic and health care claims assumptions (approximately $78 million).  Actual return on pension plan assets for 2014 exceeded the expected return on assets by $127 million creating an offsetting actuarial gain.  These items drove the increases in 2014 year end balances as compared to 2013 year end balances of $495 million in other noncurrent liabilities for retirement plans and other employee benefits, $374 million in the employee retirement liability regulatory asset and $94 million (pretax) in other comprehensive income.  The pension and OPEB plans amortizations of net actuarial losses increased by $26 million in 2015 reflecting these changes.  

 

In accordance with accounting rules, changes in benefit obligations associated with factors discussed above may be immediately recognized as a regulatory asset if related to recoverable service or in other comprehensive income and reclassified as a current cost in future years.  As such, significant portions of benefit costs recorded in any period may not reflect the actual level of cash benefits provided to plan participants.  Net direct and indirect allocated pension and OPEB costs as determined under applicable accounting rules are summarized in the following table:

 

 

 

 

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Sensitivity of these costs to changes in key assumptions is as follows:

 

 

 

See Note 10 to Financial Statements regarding other disclosures related to pension and OPEB plans obligations.

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RESULTS OF OPERATIONS

 

Operating Data

 

 

 

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(a)Includes small business, large commercial and industrial and all other non-residential distribution points of delivery.

(b)SAIDI is the average number of minutes electric service is interrupted per consumer in a year.  SAIFI is the average number of electric service interruptions per consumer in a year.  CAIDI is the average duration in minutes per electric service interruption in a year.

(c)A portion of transmission base revenues (TCOS) is recovered from Oncor’s distribution customers through the TCRF rate.

 

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Financial Results ─ Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Total operating revenues increased $56 million, or 1%, to $3.878 billion in 2015.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:

 

 

 

TCOS Filings Table

 

 

 

 

 

 

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TCRF Filings Table

 

 

 

 

 

 

EECRF Filings Table

 

 

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(a) As of March 2014, monthly charges are for a residential customer using an assumed 1,200 kWh, as the energy efficiency substantive rules require rates to be on a volumetric basis rather than a fixed monthly charge.

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Wholesale transmission service expense increased $47 million, or 6%, to $802 million in 2015 primarily due to higher fees paid to other transmission entities.

 

Operation and maintenance expense increased $26 million, or 4%, to $724 million in 2015.  The change included $31 million in higher vegetation management costs and $17 million higher labor related costs, partially offset by $4 million lower transportation expense and $7 million lower contractor costs.  Operation and maintenance expense also reflects fluctuations in expenses that are offset by corresponding reconcilable rate revenues, including a $14 million decrease related to the energy efficiency program,  $3 million in rate case expense amortization and a $4 million increase related to advanced meters.  Amortization of regulatory assets reported in operation and maintenance expense totaled $51 million and $54 million for the years ended December 31, 2015 and 2014, respectively.

 

Depreciation and amortization increased $12 million, or 1%, to $863 million in 2015.  The increase reflected $36 million attributed to ongoing investments in property, plant and equipment, partially offset by $24 million in lower amortization of regulatory assets associated with transition bonds (with an offsetting decrease in revenues).

 

Taxes other than income taxes increased $12 million, or 3%, to $450 million in 2015.  The change primarily reflects a $9 million increase in property taxes and a $2 million increase in local franchise fees.

 

Other income totaled $6 million in 2015 and $13 million in 2014.  The 2015 and 2014 amounts included accretion of an adjustment (discount) to regulatory assets resulting from purchase accounting totaling $5 million and $12 million, respectively.  See Note 13 to Financial Statements.

 

Other deductions totaled $28 million and $15 million in 2015 and 2014, respectively.  The increase was driven by  professional fees and non-recoverable pension and OPEB costs. See Note 13 to Financial Statements.

 

Provision in lieu of income taxes totaled $252 million (including an $8 million benefit related to nonoperating income) in 2015 compared to $278 million (including a $2 million benefit related to nonoperating income) in 2014.  The effective income tax rate on pretax income was 36.8% in 2015 and 38.2% in 2014.  The 2015 effective income tax rate on pretax income differs from the US federal statutory rate of 35% primarily due to the effect of the 2015 Texas margin tax.  See Note 4 to Financial Statements.

 

Interest income decreased $3 million to zero in 2015. The change primarily reflects prior year earnings related to the assets of an employee benefit plan. 

 

Interest expense and related charges decreased $20 million, or 6%, to $333 million in 2015.  The change was driven by a $25 million decrease attributable to lower average interest rates, partially offset by a $5 million increase attributable to higher average borrowings reflecting ongoing capital investments. 

 

Net income decreased $18 million, or 4%, to $432 million in 2015. The change primarily reflects higher operation and maintenance expense, depreciation and amortization,  other deductions, lower energy efficiency performance bonus and property taxes, partially offset by increased revenue from higher distribution base revenues driven by growth in points of delivery, higher transmission base revenues, lower interest expense and lower income taxes.

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Financial Results ─ Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Total operating revenues increased $270 million, or 8%, to $3.822 billion in 2014.  All revenue is billed under tariffs approved by the PUCT.  The change reflected:

 

 

 

 

 

 

 

 

 

 

 

Wholesale transmission service expense increased $167 million, or 28%, to $755 million in 2014 primarily due to higher fees paid to other transmission entities.

 

Operation and maintenance expense increased $17 million, or 2%, to $698 million in 2014.  The change included $6 million in higher contractor services, $4 million in higher vegetation management expenses, $3 million in higher software and hardware maintenance costs, $2 million in higher outsourced services costs, $2 million in higher material costs and $3 million in higher other costs.  Operation and maintenance expense also reflects fluctuations in expenses that are offset by corresponding revenues, including a $2 million decrease related to advanced meters and a $1 million decrease in costs related to programs designed to improve customer electricity efficiency.  Amortization of regulatory assets reported in operation and maintenance expense totaled $54 million and $52 million in 2014 and 2013, respectively.

 

Depreciation and amortization increased $37 million, or 5%, to $851 million in 2014.  The increase reflected $41 million attributed to ongoing investments in property, plant and equipment, partially offset by $4 million in lower amortization of regulatory assets associated with transition bonds (with an offsetting decrease in revenues).

 

Taxes other than income taxes increased $14 million, or 3%, to $438 million in 2014.  The change reflected a $9 million increase in property taxes and a $5 million increase in local franchise fees.

 

Other income totaled $13 million in 2014 and $18 million in 2013.  The 2014 and 2013 amounts included accretion of an adjustment (discount) to regulatory assets resulting from purchase accounting totaling $12 million and $17 million, respectively.  See Note 13 to Financial Statements.

 

Other deductions totaled $15 million in 2014 and 2013.  See Note 13 to Financial Statements.

 

Provision in lieu of income taxes totaled $278 million (including a  $2 million benefit related to nonoperating income)  in 2014 compared to $249 million (including $2 million related to nonoperating income) in 2013.  The effective income tax rate on pretax income was 38.2% in 2014 and 36.6% in 2013.  The 2014 effective income tax rate on pretax income differs from the US federal statutory rate of 35% primarily due to $14 million of non-deductible amortization of the regulatory asset attributable to a change in deductibility of the Medicare Part D subsidy as a result of the Patient Protection and Affordable Care Act of 2010 and the effect of the 2014 Texas margin tax, partially offset by the reversal of accrued interest and taxes totaling $5 million attributed to the resolution of certain uncertain tax positions.  See Note 4 to Financial Statements.

 

Interest income decreased $1 million, or 25%, to $3 million in 2014.  The change reflected lower earnings related to the assets of an employee benefit plan. 

 

Interest expense and related charges decreased $18 million, or 5%, to $353 million in 2014.  The change was driven by an  $18 million decrease in amortization of net debt-related costs and a $6 million decrease attributable to lower average interest rates, partially offset by a $6 million increase attributable to lower capitalized interest.

 

Net income increased $18 million, or 4%, to $450 million in 2014.  The change reflected increased revenue from higher transmission rates and lower interest expense, partially offset by higher depreciation, higher income taxes, higher operation and maintenance expenses and higher property taxes.

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OTHER COMPREHENSIVE INCOME

 

We reported ($6) million, ($59) million and ($17) million (all after tax) in other comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013, respectively.  These amounts primarily represent the net actuarial losses of the non-recoverable portion of benefit plans (see Note 10 to Financial Statements for information regarding changes to the pension plans).

 

FINANCIAL CONDITION

 

Liquidity and Capital Resources

 

Cash Flows —  Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 

 

Cash provided by operating activities totaled $1.361 billion and $1.276 billion in 2015 and 2014, respectively.  The $85 million increase is primarily the result of a $134 million decrease in federal income tax payments and a $39 million increase in over-collections of wholesale transmission service expense, partially offset by a $29 million increase in vegetation management cash costs, a $20 million impact of returning customer interconnection agreement deposits that were received in the prior period, a $21 million increase in state income tax payments and an $18 million increase in cash payments to third-party transmission providers. The decrease in federal income tax payments is the result of the December 2014 enactment of the Tax Increase Prevention Act of 2014, which retroactively reinstated 50% bonus depreciation on certain assets placed into service in 2014 resulting in receivables from our members. We settled the receivables as the 2015 estimated tax payments became due under the Tax Sharing Agreement.

 

Cash used in financing activities totaled $233 million and $202 million in 2015 and 2014, respectively.  The 2015 increase in cash used in financing activity reflected a $500 million cash principal payment due to a Fixed Senior Note maturity in 2015 (see Note 7 to Financial Statements),  a  $154 million increase in use of cash due to higher distributions paid compared to 2014 (see Note 9 to Financial Statements) and higher debt issuance costs of $7 million,  partially offset by a $475 million increase in the source of cash from issuances of long-term debt and a $163 million increase in the source of cash due to an increase in short-term borrowings to support ongoing capital investments. 

 

Cash used in investing activities, which consists primarily of capital expenditures increased $10 million, or 1% in 2015 compared to 2014. The 2015 higher capital expenditures were used to upgrade the transmission system and associated facilities, to extend the distribution infrastructure and to pursue certain initiatives in infrastructure maintenance and information technology. The increase in capital expenditures was partially offset by $39 million Bondco related funds that became unrestricted in 2015 when the Series 2003-1 bonds matured and are included in the Other caption under investing activities.

 

Depreciation and amortization expense reported in the statements of consolidated cash flows was $45 million and $41 million more than the amounts reported in the statements of consolidated income for the years ended December 31, 2015 and 2014, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense), the accretion of the adjustment (discount) to regulatory assets (reported in other income) and the amortization of debt fair value discount (reported in interest expense and related charges).

 

Cash Flows —  Year Ended December 31, 2014 Compared to Year Ended December 31, 2013 

 

Cash provided by operating activities totaled $1.276 billion and $1.370 billion in 2014 and 2013, respectively.  The $94 million change was primarily due to a $190 million increase in estimated federal and state income tax payments, an $82 million increase in cash payments to third-party transmission providers, a $66 million increase in pension and OPEB contributions,  a $33 million increase in storm and liability losses and a $22 million increase in cash purchases of materials and supplies.  These decreases in cash were partially offset by a $302 million increase in transmission and distribution receipts due to higher rates, timing of receipts and increased consumption primarily reflecting customer growth.

 

Cash used in financing activities totaled $202 million and $324 million in 2014 and 2013, respectively.  The 2014 activity reflected $282 million of cash used in distributions to our members (a $28 million decrease compared to 2013 (see Note 9 to Financial Statements)), $131 million in cash principal payments on transition bonds (a $6 million increase

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compared to 2013 (see Note 7 to Financial Statements)) and a $34 million decrease in short-term borrowings, partially offset by a $250 million increase from the issuance of long-term debt in May 2014.

 

Cash used in investing activities, which consists primarily of capital expenditures, totaled $1.097 billion in 2014 and $1.064 billion in 2013.  The $33 million, or 3%, increase was driven by higher capital expenditures for transmission and distribution facilities to serve new customers, information technology initiatives and infrastructure maintenance, partially offset by lower capital expenditures for CREZ.

 

Depreciation and amortization expense reported in the statements of consolidated cash flows was $41 million and $34 million more than the amounts reported in the statements of consolidated income for the years ended December 31, 2014 and 2013, respectively.  The differences result from amortization reported in the following different lines items in the statements of consolidated income: regulatory asset amortization (reported in operation and maintenance expense), the accretion of the adjustment (discount) to regulatory assets (reported in other income) and the amortization of debt fair value discount (reported in interest expense and related charges).

 

Long-Term Debt Activity — Repayments of long-term debt in 2015 totaled $639 million consisting of $500 million aggregate principal amount of 6.375% senior secured notes paid at the scheduled maturity date of January 15, 2015 and $139 million of transition bond principal payments at scheduled maturity dates. 

 

In March 2015, we issued $350 million aggregate principal amount of 2.950% senior secured notes maturing in April 2025 (2025 Notes) and $375 million aggregate principal amount of 3.750% senior secured notes maturing in April 2045 (2045 Notes, together with the 2025 Notes, the Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $714 million from the sale of the Notes to repay borrowings under our revolving credit facility and for other general corporate purposes.  The Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.     

 

See Note 7 to Financial Statements for additional information regarding repayments, redemptions and issuances of long-term debt.

 

Available Liquidity/Credit Facility —  Our primary source of liquidity, aside from operating cash flows, is our ability to borrow under our revolving credit facility.  In October 2015, we exercised one of the two one-year extensions available to us and extended the term of the revolving credit facility to October 2017.  Also in October 2015, we exercised our option to permanently reduce the loan commitment available under the revolving credit facility from $2.4 billion to $2.0 billion.  Subject to the limitations described below, available borrowing capacity under our revolving credit facility totaled $1.153 billion and $1.682 billion at December 31, 2015 and 2014, respectively.  We may request an increase in our borrowing capacity of $100 million in the aggregate and/or a  one-year extension, provided certain conditions are met, including lender approval.

 

The revolving credit facility contains a senior debt-to-capitalization ratio covenant that effectively limits our ability to incur indebtedness in the future.  At December 31, 2015, we were in compliance with the covenant.  See “Financial Covenants, Credit Rating Provisions and Cross Default Provisions” below for additional information on this covenant and the calculation of this ratio.  The revolving credit facility and the senior notes and debentures issued by us are secured by the Deed of Trust, which permits us to secure other indebtedness with the lien of the Deed of Trust up to the aggregate of (i) the amount of available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that have been certified to the Deed of Trust collateral agent.  Accordingly, the availability under our revolving credit facility is limited by the amount of available bond credits and any property additions certified to the Deed of Trust collateral agent in connection with the revolving credit facility borrowings.  In addition, our outstanding senior notes and debentures are secured by the Deed of Trust.  To the extent we continue to issue debt securities secured by the Deed of Trust, those debt securities would also be limited by the amount of available bond credits and any property additions that have been certified to the Deed of Trust collateral agent.  At December 31, 2015, the available bond credits totaled $2.577 billion, and the amount of additional potential indebtedness that could be secured by property additions, subject to the completion of a certification process, totaled $1.261 billion.  At both December 31, 2015 and February 25, 2016, the available borrowing capacity of the revolving credit facility could be fully drawn.

 

Under the terms of our revolving credit facility, the commitments of the lenders to make loans to us are several and not joint.  Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to

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the aggregate amount of such lender’s commitments under the facility.  See Note 6 to Financial Statements for additional information regarding the revolving credit facility.

 

Cash and cash equivalents totaled $25 million and $4 million at December 31, 2015 and 2014, respectively.  Available liquidity (cash and available revolving credit facility capacity) at December 31, 2015 totaled $1.178 billion reflecting a decrease of $508 million from December 31, 2014 primarily due to our option to reduce the revolving credit facility capacity in October 2015.   

 

We also committed to the PUCT that we would maintain a regulatory capital structure at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At December 31, 2015 and 2014, our regulatory capitalization ratios were 59.8% debt and 40.2% equity and 58.8% debt and 41.2% equity, respectively.  See Note 9 to Financial Statements for discussion of the regulatory capitalization ratio.

 

Liquidity Needs, Including Capital Expenditures — Our board of directors, which annually approves capital expenditure estimates for the following year, has approved capital expenditures totaling $1.4 billion in 2016.  Management currently expects to recommend to our board of directors capital expenditures of approximately $1.5 billion in each of the years 2017 through 2021.  These capital expenditures are expected to be used for investment in transmission and distribution infrastructure.

 

We expect cash flows from operations, combined with availability under the revolving credit facility, to provide sufficient liquidity to fund current obligations, projected working capital requirements, maturities of long-term debt and capital spending for at least the next twelve months.  We do not anticipate the EFH Bankruptcy Proceedings to have a material impact on our liquidity.  Should additional liquidity or capital requirements arise, we may need to access capital markets, generate equity capital or preserve equity through reductions or suspension of distributions to members.  In addition, we may also consider new debt issuances, repurchases, exchange offers and other transactions in order to refinance or manage our long-term debt.  The inability to raise capital on favorable terms or failure of counterparties to perform under credit or other financial agreements, particularly during any uncertainty in the financial markets, could impact our ability to sustain and grow the business and would likely increase capital costs that may not be recoverable through rates.

 

Distributions — On February 24, 2016, our board of directors declared a cash distribution of $56 million, which was paid to our members on February 25, 2016.  See Note 9 to Financial Statements for discussion of distribution restrictions.

 

During 2015, our board of directors declared, and we paid, the following cash distributions to our members:

 

 

Pension and OPEB Plans Funding — Our funding for the pension plans and Oncor OPEB Plan for the calendar year 2016 is expected to total $4 million and $30 million, respectively.  Based on the funded status of the pension plans at December 31, 2015, our aggregate pension plans and Oncor OPEB Plan funding is expected to total approximately $593  million in the period 2016 to 2020.  In 2015, we made cash contributions to the pension plans and OPEB plans of $54 million and $25 million, respectively.  See Note 10 to Financial Statements for additional information regarding pension and OPEB plans.

 

Capitalization — Our capitalization ratios were 42.9% and 39.8% long-term debt, less amounts due currently, to 57.1% and 60.2% membership interests at December 31, 2015 and 2014, respectively.

 

Financial Covenants, Credit Rating Provisions and Cross Default Provisions — Our revolving credit facility contains a financial covenant that requires maintenance of a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00.  For purposes of this ratio, debt is calculated as indebtedness defined in the revolving credit facility

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(principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with US GAAP).  The debt calculation excludes transition bonds issued by Bondco, but includes the unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with US GAAP plus indebtedness described above.  At December 31, 2015, we were in compliance with this covenant with a debt-to-capitalization ratio of 0.46 to 1.00.

 

Impact on Liquidity of Credit Ratings — The rating agencies assign credit ratings to certain of our debt securities.  Our access to capital markets and cost of debt could be directly affected by our credit ratings.  Any adverse action with respect to our credit ratings could generally cause borrowing costs to increase and the potential pool of investors and funding sources to decrease.  In particular, a decline in credit ratings would increase the cost of our revolving credit facility (as discussed below).  In the event any adverse action with respect to our credit ratings takes place and causes borrowing costs to increase, we may not be able to recover such increased costs if they exceed our PUCT-approved cost of debt determined in our most recent rate review or subsequent rate reviews.

 

Most of our large suppliers and counterparties require an expected level of creditworthiness in order for them to enter into transactions with us.  If our credit ratings decline, the costs to operate our business could increase because counterparties could require the posting of collateral in the form of cash-related instruments, or counterparties could decline to do business with us.

 

Presented below are the credit ratings assigned for our debt securities at February 25, 2016.  Oncor remains on “developing”  outlook with S&P, “positive” outlook with Moody’s and “stable” outlook with Fitch. 

 

 

 

 

As described in Note 7 to Financial Statements, our long-term debt, excluding Bondco’s non-recourse debt, is currently secured pursuant to the Deed of Trust by a first priority lien on certain of our transmission and distribution assets and is considered senior secured debt.

 

A rating reflects only the view of a rating agency, and is not a recommendation to buy, sell or hold securities.  Ratings can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change.

 

Material Credit Rating Covenants — Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings.  Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  Based on the current ratings assigned to our debt securities at February 25, 2016, our borrowings are generally LIBOR-based and will bear interest at LIBOR plus 1.125%.  A decline in credit ratings would increase the cost of our revolving credit facility and likely increase the cost of any debt issuances and additional credit facilities.

 

Material Cross Default Provisions — Certain financing arrangements contain provisions that may result in an event of default if there was a failure under other financing arrangements to meet payment terms or to observe other covenants that could result in an acceleration of payments due.  Such provisions are referred to as “cross default” provisions.

 

Under our revolving credit facility, a default by us or our subsidiary in respect of indebtedness in a principal amount in excess of $100 million or any judgments for the payment of money in excess of $50 million that are not discharged within 60 days may cause the maturity of outstanding balances ($840 million in short-term borrowings and $7 million in letters of credit at December 31, 2015) under that facility to be accelerated.  Additionally, under the Deed of Trust, an event of default under either our revolving credit facility or our indentures would permit our lenders and the holders of our senior secured notes to exercise their remedies under the Deed of Trust.

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Long-Term Contractual Obligations and Commitments — The following table summarizes our contractual cash obligations at December 31, 2015.  See Notes 7 and 8 to Financial Statements for additional disclosures regarding these long-term debt and non-cancelable purchase obligations.

 

 

 

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(a)   Includes short-term noncancelable leases.

 

The following are not included in the table above:

 

Guarantees — At December 31, 2015, we did not have any material guarantees.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

At December 31, 2015, we did not have any material off-balance sheet arrangements with special purpose entities or VIEs.

 

COMMITMENTS AND CONTINGENCIES

 

See Note 8 to Financial Statements for details of commitments and contingencies.

 

CHANGES IN ACCOUNTING STANDARDS

 

See Note 1 to Financial Statements for discussion of changes in accounting standards.

 

REGULATION AND RATES

 

State Legislation

 

During the 2015 legislative session, the Texas Legislature passed Senate Bill 774 which provides a two-year extension of the provisions of the 2011 periodic rate adjustment (or Distribution Cost Recovery Factor) bill, and requires the PUCT to provide a study of alternative ratemaking mechanisms prior to the next regular legislative session in 2017.  The Texas Legislature also passed The Franchise Tax Reduction Act of 2015 that reduces the Texas margin tax rate from 1% to 0.75%. The impact to Oncor for 2015 is a tax reduction of approximately $4 million (after federal tax). Other legislation passed during the 2015 legislative session is not expected to have a material impact on our financial position, results of operations or cash flows.

 

Matters with the PUCT

 

Change in Control Review (PUCT Docket No. 45188) — In connection with the EFH Acquisition contemplated by the Plan of Reorganization filed in the EFH Bankruptcy Proceedings in September 2015, Oncor and the Purchasers in the

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EFH Acquisition filed a joint report and application for regulatory approvals pursuant to PURA. For additional information regarding the EFH Acquisition and application for regulatory approval, see Note 2 to Financial Statements.

 

2008 Rate Review (PUCT Docket No. 35717) — In August 2009, the PUCT issued a final order with respect to our June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (PUCT Docket No. 35717), and new rates were implemented in September 2009.  We and four other parties appealed various portions of the rate review final order to a state district court.  In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  We filed an appeal with the Texas Third Court of Appeals (Austin Court of Appeals) in February 2011 with respect to the issues we appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities.  In early August 2014, the Austin Court of Appeals reversed the district court and affirmed the PUCT with respect to the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  The Austin Court of Appeals also reversed the PUCT and district court’s rejection of a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset our taxable income against losses from other investments and remanded the issue to the PUCT to determine the amount of the consolidated tax savings adjustment.  In late August 2014, we filed a motion on rehearing with the Austin Court of Appeals with respect to certain appeal issues on which we were not successful, including the consolidated tax savings adjustment.  In December 2014, the Austin Court of Appeals issued its opinion, clarifying that it was rendering judgment on the rate discount for state colleges and universities issue (affirming that PURA no longer requires imposition of the rate discount) rather than remanding it to the PUCT, and dismissing the motions for rehearing regarding the franchise fee issue and the consolidated tax savings adjustment.  We filed a petition for review with the Texas Supreme Court in February 2015.  At the request of the court, the parties filed responses to the petitions for review and replies in June and July 2015, respectively.  The Texas Supreme Court subsequently requested full briefing on the merits, and the briefing period ended on January 25, 2016.  On February 19, 2016, the Texas Supreme Court granted the petition for review, with the date and time of oral arguments to be set at a later date.  There is no deadline for the court to act.  If our appeals efforts are unsuccessful and the proposed consolidated tax savings adjustment is implemented, we estimate that on remand, the impact on earnings of the consolidated tax savings adjustment’s value could range from zero, as originally determined by the PUCT in Docket 35717, to a $135 million loss (after tax) including interest. Interest accrues at the PUCT approved rate for over-collections, which is 0.18% for 2016. We do not believe that any of the other issues ruled upon by the Austin Court of Appeals would result in a material impact to our results of operations or financial condition.

 

Summary

 

We cannot predict future regulatory or legislative actions or any changes in economic and securities market conditions.  Such actions or changes could significantly alter our basic financial position, results of operations or cash flows.

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Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

Interest Rate Risk

 

Market risk is the risk that we may experience a loss in value as a result of changes in market conditions such as interest rates that may be experienced in the ordinary course of business.  We may transact in financial instruments to hedge interest rate risk related to our debt, but there are currently no such hedges in place.  All of our long-term debt at December 31, 2015 and 2014 carried fixed interest rates.

 

 

 

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(a)Excludes unamortized premiums and discounts.  See Note 7 to Financial Statements for a discussion of changes in long-term debt obligations.

 

Our revolving credit facility contains terms pursuant to which the interest rates charged under the agreement may be adjusted depending on credit ratings. For information on our interest rates charged under the revolving credit facility, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Available Liquidity/Credit Facility – Material Credit Rating Covenants.”

 

Credit Risk

 

Credit risk relates to the risk of loss associated with nonperformance by counterparties.  Our customers consist primarily of REPs.  As a prerequisite for obtaining and maintaining certification, a REP must meet the financial resource standards established by the PUCT.  Meeting these standards does not guarantee that a REP will be able to perform its obligations.  REP certificates granted by the PUCT are subject to suspension and revocation for significant violation of PURA and PUCT rules.  Significant violations include failure to timely remit payments for invoiced charges to a transmission and distribution utility pursuant to the terms of tariffs approved by the PUCT.  We believe PUCT rules that allow for the recovery of uncollectible amounts due from nonaffiliated REPs through rates significantly reduce our credit risk.

 

Our net exposure to credit risk associated with trade accounts and other receivables from affiliates totaled $114 million at December 31, 2015, of which $2 million is offset with trade accounts and other payables to affiliates and $4 million is secured by letters of credit posted by TCEH for our benefit.  Due to commitments made to the PUCT, this concentration of accounts receivable from affiliates increases the risk that a default could have a material effect on earnings and cash flows.  See Notes  2 and 8 to Financial Statements for additional information regarding the potential impacts of the EFH Bankruptcy Proceedings on our transactions with affiliates and Note 12 to Financial Statements for additional information regarding our transactions involving members of the Texas Holdings Group.

 

Our exposure to credit risk associated with trade accounts receivable from nonaffiliates totaled $391 million at December 31, 2015.  The nonaffiliated receivable amount is before the allowance for uncollectible accounts, which totaled $3 million at December 31, 2015.  The nonaffiliated exposure includes trade accounts receivable from REPs totaling $290 million, which are almost entirely noninvestment grade.  At December 31, 2015, REP subsidiaries of a nonaffiliated entity collectively represented approximately 13% of the nonaffiliated trade receivable amount.  No other nonaffiliated parties represented 10% or more of the total trade accounts receivable amount.  We view our exposure to this customer to be within an acceptable level of risk tolerance considering PUCT rules and regulations; however, this concentration increases the risk that a default could have a material effect on cash flows.

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FORWARD-LOOKING STATEMENTS

 

This report and other presentations made by us contain “forward-looking statements.”  All statements, other than statements of historical facts, that are included in this report, or made in presentations, in response to questions or otherwise, that address activities, events or developments that we expect or anticipate to occur in the future, including such matters as projections, capital allocation, future capital expenditures, business strategy, competitive strengths, goals, future acquisitions or dispositions, development or operation of facilities, market and industry developments and the growth of our business and operations (often, but not always, through the use of words or phrases such as “intends,” “plans,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “should,” “projection,” “target,” “goal,” “objective” and “outlook”), are forward-looking statements.  Although we believe that in making any such forward-looking statement our expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the discussion of risk factors under “Item 1A.  Risk Factors” and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations" in this report and the following important factors, among others, that could cause actual results to differ materially from those projected in such forward-looking statements:

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Any forward-looking statement speaks only at the date on which it is made, and, except as may be required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events.  New factors emerge from time to time, and it is not possible for us to predict all of them; nor can we assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.  As such, you should not unduly rely on such forward-looking statements.

 

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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Members of Oncor Electric Delivery Company LLC

Dallas, Texas

 

We have audited the accompanying consolidated balance sheets of Oncor Electric Delivery Company LLC and subsidiary (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows, and membership interests for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oncor Electric Delivery Company LLC and subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

 

As discussed in Note 1 to the consolidated financial statements, the Company has implemented certain ring-fencing measures which management believes mitigate the Company's potential exposure to the EFH Bankruptcy Proceedings.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.

 

 

/s/ Deloitte & Touche LLP

 

Dallas, Texas

February 25, 2016

 

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ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED INCOME

 

 

 

 

 

See Notes to Financial Statements.

 

 

 

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

 

 

 

 

 

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED CASH FLOWS

 

 

 

 

 

 

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

CONSOLIDATED BALANCE SHEETS

 

 

See Notes to Financial Statements.

 

 

 

 

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ONCOR ELECTRIC DELIVERY COMPANY LLC

STATEMENTS OF CONSOLIDATED MEMBERSHIP INTERESTS

 

 

 

 

 

 

See Notes to Financial Statements.

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ONCOR ELECTRIC DELIVERY COMPANY LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.    DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

References in this report to “we,” “our,” “us” and “the company” are to Oncor and/or its subsidiary as apparent in the context.  See “Glossary” for definition of terms and abbreviations.

 

We are a regulated electricity transmission and distribution company principally engaged in providing delivery services to REPs, including subsidiaries of TCEH, that sell power in the north-central, eastern and western parts of Texas.  Revenues from TCEH represented 25%,  25% and 27% of our total operating revenues for the years ended December 31, 2015, 2014 and 2013, respectively.  We are a direct, majority-owned subsidiary of Oncor Holdings, which is a direct, wholly-owned subsidiary of EFIH, a direct, wholly-owned subsidiary of EFH Corp.  EFH Corp. is a subsidiary of Texas Holdings, which is controlled by the Sponsor Group.  Oncor Holdings owns 80.03% of our membership interests, Texas Transmission owns 19.75% of our membership interests and certain members of our management team and board of directors indirectly own the remaining membership interests through Investment LLC.  We are managed as an integrated business; consequently, there are no separate reportable business segments.

 

Our consolidated financial statements include our wholly-owned, bankruptcy-remote financing subsidiary, Bondco, a VIE (see Note 13).  This financing subsidiary was organized for the limited purpose of issuing certain transition bonds to recover generation-related regulatory asset stranded costs and other qualified costs under an order issued by the PUCT in 2002.  Bondco issued an aggregate $1.3 billion principal amount of transition bonds during 2003 and 2004.    The 2003 Series transition bonds matured in 2015 and were paid in full.  The 2004 Series transition bonds, with an outstanding balance of $41 million at December 31, 2015, mature in May 2016.  Final true-up proceedings for the 2004 Bonds are expected to be conducted by the PUCT during 2016 and are expected to have minimal or zero net income impact.

 

Various “ring-fencing” measures have been taken to enhance the separateness between the Oncor Ring-Fenced Entities and the Texas Holdings Group and our credit quality.  These measures serve to mitigate our and Oncor Holdings’ credit exposure to the Texas Holdings Group and to reduce the risk that our assets and liabilities or those of Oncor Holdings would be substantively consolidated with the assets and liabilities of the Texas Holdings Group in connection with a bankruptcy of one or more of those entities, including the EFH Bankruptcy Proceedings discussed below.  Such measures include, among other things: our sale of a 19.75% equity interest to Texas Transmission in November 2008; maintenance of separate books and records for the Oncor Ring-Fenced Entities; our board of directors being comprised of a majority of independent directors; and prohibitions on the Oncor Ring-Fenced Entities providing credit support to, or receiving credit support from, any member of the Texas Holdings Group.  The assets and liabilities of the Oncor Ring-Fenced Entities are separate and distinct from those of the Texas Holdings Group, including TXU Energy and Luminant, and none of the assets of the Oncor Ring-Fenced Entities are available to satisfy the debt or contractual obligations of any member of the Texas Holdings Group.  We do not bear any liability for debt or contractual obligations of the Texas Holdings Group, and vice versa.  Accordingly, our operations are conducted, and our cash flows are managed, independently from the Texas Holdings Group.

 

EFH Bankruptcy Proceedings

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 2 for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements.

 

Basis of Presentation

 

Our consolidated financial statements have been prepared in accordance with US GAAP.  All dollar amounts in the financial statements and tables in the notes are stated in millions of US dollars unless otherwise indicated.

 

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Consolidation of Variable Interest Entities

 

A VIE is an entity with which we have a relationship or arrangement that indicates some level of control over the entity or results in economic risks to us.  We consolidate a VIE if we have: a) the power to direct the significant activities of the VIE and b) the right or obligation to absorb profit and loss from the VIE (primary beneficiary).  See Note 13.

 

Income Taxes

 

Effective with the November 2008 sale of equity interests to Texas Transmission and Investment LLC, we became a partnership for US federal income tax purposes, and subsequently we are not a member of EFH Corp.’s consolidated tax group and only EFH Corp.’s share of our partnership income is included in its consolidated federal income tax return.  Our tax sharing agreement with Oncor Holdings and EFH Corp. was amended in November 2008 to include Texas Transmission and Investment LLC.  The tax sharing agreement provides for the calculation of tax liability substantially as if we and Oncor Holdings were taxed as corporations, and requires tax payments to members determined on that basis (without duplication for any income taxes paid by a subsidiary of Oncor Holdings). 

 

While partnerships are not subject to income taxes, in consideration of the tax sharing agreement and the presentation of our financial statements as an entity subject to cost-based regulatory rate-setting processes, with such costs including income taxes, the financial statements present amounts determined under the tax sharing agreement as “provision in lieu of income taxes” and “liability in lieu of deferred income taxes” for periods subsequent to the sales of equity interests discussed in Note 4.  Such amounts are determined in accordance with the provisions of accounting guidance for income taxes and for uncertainty in income taxes and thus differences between the book and tax bases of assets and liabilities are accounted for as if we were taxed as a corporation.  The accounting guidance for rate-regulated enterprises requires the recognition of regulatory assets or liabilities if it is probable such deferred tax amounts will be recovered from, or returned to customers in future rates.  Investment tax credits are amortized to income over the estimated lives of the related properties.

 

We classify interest and penalties expense related to uncertain tax positions as current provision in lieu of income taxes as discussed in Note 4.

 

Use of Estimates

 

Preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reporting of assets and liabilities at the balance sheet dates and the reported amounts of revenue and expense, including fair value measurements.  In the event estimates and/or assumptions prove to be different from actual amounts, adjustments are made in subsequent periods to reflect more current information.  No material adjustments were made to previous estimates or assumptions during the current year.

 

Derivative Instruments and Mark-to-Market Accounting

 

We have from time-to-time entered into derivative instruments to hedge interest rate risk.  If the instrument meets the definition of a derivative under accounting standards related to derivative instruments and hedging activities, the fair value of each derivative is recognized on the balance sheet as a derivative asset or liability and changes in the fair value are recognized in net income, unless criteria for certain exceptions are met.  This recognition is referred to as “mark-to-market” accounting.

 

Reconcilable Tariffs

 

The PUCT has designated certain tariffs (TCRF, EECRF surcharges, AMS surcharges and charges related to transition bonds) as reconcilable, which means the differences between amounts billed under these tariffs and the related incurred costs are deferred as either regulatory assets or regulatory liabilities.  Accordingly, at prescribed intervals, future tariffs are adjusted to either repay regulatory liabilities or collect regulatory assets.

 

Revenue Recognition

 

Revenue includes an estimate for electricity delivery services provided from the billed meter reading date to the end of the period (unbilled revenue).  For electricity delivery services billed on the basis of kWh volumes, unbilled revenue is

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based on data collected through our AMS.    For other electricity delivery services, unbilled revenue is based on average daily revenues for the most recent period applied to the number of unmetered days through the end of the period.  

 

Impairment of Long-Lived Assets and Goodwill

 

We evaluate long-lived assets (including intangible assets with finite lives) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

 

We also evaluate goodwill for impairment annually (at December 1) and whenever events or changes in circumstances indicate that an impairment may exist.  The determination of the existence of these and other indications of impairment involves judgments that are subjective in nature and may require the use of estimates in forecasting future results and cash flows.

 

If at the assessment date our carrying value exceeds our estimated fair value (enterprise value), then the estimated enterprise value is compared to the estimated fair values of our operating assets (including identifiable intangible assets) and liabilities at the assessment date.  The resultant implied goodwill amount is compared to the recorded goodwill amount.  Any excess of the recorded goodwill amount over the implied goodwill amount is written off as an impairment charge.

 

The goodwill impairment tests performed in 2015 and 2014  were based on a qualitative assessment in which we considered macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relative factors.  The goodwill impairment test performed in 2013 was based on determinations of enterprise value using discounted cash flow analyses, comparable company equity values and any relevant transactions indicative of enterprise values (quantitative assessment).  Based on tests results, no impairments were recognized in 2015, 2014 or 2013.

 

System of Accounts

 

Our accounting records have been maintained in accordance with the FERC Uniform System of Accounts as adopted by the PUCT.

 

Defined Benefit Pension Plans and OPEB Plans

 

We have liabilities under pension plans that offer benefits based on either a traditional defined benefit formula or a cash balance formula and an OPEB plan that offers certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees from the company.  Costs of pension and OPEB plans are dependent upon numerous factors, assumptions and estimates.  See Note 10 for additional information regarding pension and OPEB plans.

 

Contingencies

 

We evaluate and account for contingencies using the best information available.  A loss contingency is accrued and disclosed when it is probable that an asset has been impaired or a liability incurred and the amount of the loss can be reasonably estimated.  If a range of probable loss is established, the minimum amount in the range is accrued, unless some other amount within the range appears to be a better estimate.  If the probable loss cannot be reasonably estimated, no accrual is recorded, but the loss contingency is disclosed to the effect that the probable loss cannot be reasonably estimated.  A loss contingency will be disclosed when it is reasonably possible that an asset has been impaired or a liability incurred.  If the likelihood that an impairment or incurrence is remote, the contingency is neither accrued nor disclosed.  Gain contingencies are recognized upon realization.

 

Fair Value of Nonderivative Financial Instruments

 

The carrying amounts for financial assets classified as current assets and the carrying amounts for financial liabilities classified as current liabilities approximate fair value due to the short maturity of such instruments.  The fair values of other financial instruments, for which carrying amounts and fair values have not been presented, are not materially different than their related carrying amounts.  The following discussion of fair value accounting standards applies primarily to our determination of the fair value of assets in the pension and OPEB plans trusts (see Note 10) and long-term debt (see Note 7).

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Accounting standards related to the determination of fair value define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  We use a “mid-market” valuation convention (the mid-point price between bid and ask prices) as a practical expedient to measure fair value for the majority of our assets and liabilities subject to fair value measurement on a recurring basis.  We primarily use the market approach for recurring fair value measurements and use valuation techniques to maximize the use of observable inputs and minimize the use of unobservable inputs.

 

We categorize our assets and liabilities recorded at fair value based upon the following fair value hierarchy:

 

 

We utilize several different valuation techniques to measure the fair value of assets and liabilities, relying primarily on the market approach of using prices and other market information for identical and/or comparable assets and liabilities for those items that are measured on a recurring basis.

 

Franchise Taxes

 

Franchise taxes are assessed to us by local governmental bodies, based on kWh delivered and are the principal component of taxes other than amounts related to income taxes as reported in the income statement.  Franchise taxes are not a “pass through” item.  The rates we charge customers are intended to recover the franchise taxes, but we are not acting as an agent to collect the taxes from customers.

 

Cash and Cash Equivalents

 

For purposes of reporting cash and cash equivalents, temporary cash investments purchased with a remaining maturity of three months or less are considered to be cash equivalents.  See Note 13 for details regarding restricted cash.

 

Property, Plant and Equipment

 

Properties are stated at original cost. The cost of self-constructed property additions includes materials and both direct and indirect labor and applicable overhead and an allowance for funds used during construction.

 

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated service lives of the properties based on depreciation rates approved by the PUCT.  As is common in the industry, depreciation expense is recorded using composite depreciation rates that reflect blended estimates of the lives of major asset groups as compared to depreciation expense calculated on a component asset-by-asset basis.  Depreciation rates include plant removal costs as a component of depreciation expense, consistent with regulatory treatment.  Actual removal costs incurred are charged to accumulated depreciation.  When accrued removal costs exceed incurred removal costs, the difference is reclassified as a regulatory obligation to retire assets in the future.

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Allowance for Funds Used During Construction (AFUDC)

 

AFUDC is a regulatory cost accounting procedure whereby both interest charges on borrowed funds and a return on equity capital used to finance construction are included in the recorded cost of utility plant and equipment being constructed.  AFUDC is capitalized on all projects involving construction periods lasting greater than thirty days.  The equity portion, if any, of capitalized AFUDC is accounted for as other income.  See Note 13 for detail of amounts charged to interest expense.

 

Regulatory Assets and Liabilities

 

Our financial statements reflect regulatory assets and liabilities under cost-based rate regulation in accordance with accounting standards related to the effect of certain types of regulation.  Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates.    See Note 5 for details of regulatory assets and liabilities.

 

Changes in Accounting Standards

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update No. 2015-03 (ASU 2015-03),  Simplifying the Presentation of Debt Issuance Costs.  The update requires that debt issuance costs be presented as a direct reduction to the face value of the related debt liability rather than as an asset, consistent with the presentation of debt discounts.  We adopted ASU 2015-03 as of December 31, 2015, and applied its provisions retrospectively. The adoption resulted in the reclassification of $36 million and $34 million of unamortized debt issuance costs from other non-current assets to long-term debt within the consolidated balance sheets as of December 31, 2015 and December 31, 2014, respectively. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on our reported results of operations, financial condition or cash flows.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers.  ASU 2014-09 introduces new, increased requirements for disclosure of revenue in financial statements and is intended to eliminate inconsistencies in revenue recognition and thereby improve financial reporting comparability across entities, industries and capital markets.  ASU 2014-09 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017 for public entities.  Early application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. We are currently evaluating the potential impact of ASU 2014-09.  The adoption of ASU 2014-09 is not expected to have a material effect on our reported results of operations, financial condition or cash flows.

 

2.    EFH BANKRUPTCY PROCEEDINGS

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed above mitigate our potential exposure to the EFH Bankruptcy Proceedings.  See Note 1 and below for further information regarding the EFH Bankruptcy Proceedings and the proposed change in control of Oncor’s indirect majority owner in connection with such proceedings.

 

The US Bankruptcy Code automatically enjoined, or stayed, us from judicial or administrative proceedings or filing of other actions against our affiliates or their property to recover, collect or secure our claims arising prior to the EFH Petition Date.  Following the EFH Petition Date, EFH Corp. received approval from the bankruptcy court to pay or otherwise honor certain prepetition obligations generally designed to stabilize its operations.  Included in the approval were the obligations owed to us representing our prepetition electricity delivery fees.  As of the EFH Petition Date, we estimated that our receivables from the Texas Holdings Group totaled approximately $129 million.  Since that time, we have collected $127 million of the prepetition amount.  We estimate any potential pre-tax loss resulting from the EFH Bankruptcy Proceedings to be immaterial.  A provision for uncollectible accounts from affiliates has not been established as of December 31, 2015.

 

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Potential Change in Indirect Ownership of Oncor

 

As part of the EFH Bankruptcy Proceedings, on September 21, 2015, the EFH Debtors filed their fifth amended plan of reorganization (as such may be amended from time to time, Plan of Reorganization) and related amended disclosure statement (the Disclosure Statement).  Also on September 21, 2015, the bankruptcy court approved the Disclosure Statement and the EFH Debtors’ related Plan of Reorganization solicitation procedures.  The EFH Debtors solicited votes on the Plan of Reorganization and received significant support in favor of confirmation.  The EFH Debtors filed their sixth amended Plan of Reorganization on December 6, 2015 to address and resolve several issues raised by parties in interest and the bankruptcy court.  The bankruptcy court confirmed the EFH Debtors' sixth amended Plan of Reorganization by order dated December 9, 2015.  The EFH Debtors presently are seeking regulatory approvals for the transactions contemplated by the Plan of Reorganization, which approvals are conditions to the Plan of Reorganization effective date.  We cannot predict the outcome of these regulatory proceedings and whether the Plan of Reorganization will become effective.

 

In general, the Plan of Reorganization calls for a merger and investment structure that involves a tax-free deconsolidation of TCEH from EFH Corp., immediately followed by the acquisition of reorganized EFH Corp. financed by existing TCEH creditors and third party investors.  In this regard, the Plan of Reorganization provides for a series of transactions that would lead to a significant change in the indirect equity ownership of Oncor.  Under the terms of the Plan of Reorganization, on the effective date, acquisition entities (Purchasers) controlled by an investor group (collectively, the Investor Group) consisting of certain unsecured creditors of TCEH and an affiliate of Hunt Consolidated, Inc. (Hunt), as well as certain other investors designated by Hunt to acquire (EFH Acquisition) reorganized EFH Corp. (Reorganized EFH), would acquire pursuant to a merger and purchase agreement direct or indirect equity interests in Reorganized EFH and EFIH that indirectly represent all of the outstanding equity interests in Oncor Holdings and at least 80.03% of the outstanding equity interests in Oncor.  As part of the transactions contemplated by the merger and purchase agreement, among other things, the Investor Group intends to raise up to $12.6 billion of equity and debt financing to invest in Reorganized EFH, and a successor to Reorganized EFH will be converted to a real estate investment trust (REIT) under the Internal Revenue Code.

 

In addition, and in connection with the merger and purchase agreement referred to above, at the request of and with the consent of EFIH, we and Oncor Holdings entered into a letter agreement with the Purchasers.  The letter agreement sets forth certain rights and obligations of the Oncor entities and the Purchasers to cooperate in the manner set forth therein with respect to initial steps to be taken in connection with the EFH Acquisition and the other transactions described in the merger and purchase agreement.

 

The letter agreement is not intended to give the Purchasers, directly or indirectly, the right to control or direct the operations of any Oncor entity prior to the receipt of all approvals required by the PUCT and other governmental entities and the consummation of the EFH Acquisition and related transactions (if and when such transactions are consummated).  In addition, Oncor Holdings and Oncor have not endorsed or approved any restructuring involving Oncor Holdings or Oncor or any other transaction proposed by the Purchasers involving Oncor Holdings or Oncor, and the parties acknowledge that further action will be required by Oncor Holdings and Oncor in order for any such restructuring or other transaction to be completed. 

 

In connection with the proposed EFH Acquisition, EFH Corp. has taken the position that, unless the Purchasers have otherwise acquired, or entered into a definitive agreement with Texas Transmission for the acquisition of the equity interest in Oncor held by Texas Transmission at the consummation of the EFH Acquisition, certain of EFH Corp.’s  rights contained in the Investor Rights Agreement (Investor Rights Agreement), dated November 2008 among Oncor and certain of its direct and indirect equity holders, including EFH Corp. and Texas Transmission, would require Texas Transmission to sell its equity interest in Oncor to the Purchasers in connection with the EFH Acquisition. In this regard, in October 2015, EFH Corp. filed a complaint against Texas Transmission alleging breach of Texas Transmission’s obligations under the Investor Rights Agreement for failing to agree to sell its equity interest in Oncor in connection with the proposed EFH Acquisition. 

 

The Purchasers have intervened in the pending litigation. The parties are in the process of conducting discovery and engaging in other pretrial matters.  We cannot predict the outcome of this pending litigation between EFH Corp. and Texas Transmission relating to the Investor Rights Agreement and the impact of such litigation on the EFH Acquisition and related transactions.

 

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As a general matter, although the Plan of Reorganization has been confirmed by the Bankruptcy Court, we cannot predict the ultimate outcome of the EFH Bankruptcy Proceedings, including whether the transactions contemplated by the Plan of Reorganization will (or when they will) close. In addition, the transactions are subject to customary closing conditions, including receipt of all applicable regulatory approvals.  In this regard in September 2015, Oncor and the Purchasers filed a joint application with the PUCT seeking certain regulatory approvals with respect to the transactions contemplated by the Plan of Reorganization, and a ruling with respect to such application is expected by late March 2016.  Regulatory approvals with respect to those transactions were the subject of an  application filed by Oncor and the Purchasers with FERC.  FERC issued an order conditionally approving the transactions on December 4, 2015. As indicated above, PUCT approval remains pending, and there can be no assurance if or when the required regulatory approval will be obtained or if the conditions to any such approval will be acceptable to the Purchasers.

 

In addition, in connection with the EFH Bankruptcy Proceedings, the EFH Debtors and various creditor parties entered into a settlement agreement (the Settlement Agreement) in August 2015 (as amended in September 2015) to compromise and settle, among other things (a) intercompany claims among the EFH Debtors, (b) claims and causes of actions against holders of first lien claims against TCEH and the agents under the TCEH Senior Secured Facilities, (c) claims and causes of action against holders of interests in EFH Corp. and certain related entities and (d) claims and causes of action against each of the EFH Debtors' current and former directors, the Sponsor Group, managers and officers and other related entities.  The Settlement Agreement contemplates a release of such claims upon approval of the Settlement Agreement by the Bankruptcy Court, which would remain in effect whether or not the EFH Acquisition is completed or the Plan of Reorganization becomes effective.  The Bankruptcy Court approved the Settlement Agreement in December 2015.

 

The Settlement Agreement settles substantially all inter-debtor claims through the effective date of the Settlement Agreement.  These settled claims include potentially contentious inter-debtor claims, including various potential avoidance actions and claims arising under numerous debt agreements, tax sharing agreements, and contested property transfers.  The release provisions of the Settlement Agreement took effect immediately upon the entry of the Bankruptcy Court order approving the Settlement Agreement and are not contingent upon either the Plan of Reorganization becoming effective or the closing of the EFH Acquisition.  Accordingly, substantially all of the potential affiliate claims, derivative claims and other types of disputes among affiliates (including claims against Oncor) have been resolved by bankruptcy court order.  Accordingly, we believe the Settlement Agreement resolves all affiliate claims against Oncor and its assets existing as of the effective date of the Settlement Agreement.

 

The EFH Bankruptcy Proceedings continue to be a complex litigation matter and the full extent of potential impacts on Oncor remains unknown.  We will continue to evaluate our affiliate transactions and contingencies throughout the EFH Bankruptcy Proceedings to determine any risks and resulting impacts on our results of operations, financial statements and cash flows.

 

See Note 12 for details of our related-party transactions with members of the Texas Holdings Group.

 

3.    REGULATORY MATTERS

 

Change in Control Review

 

In connection with the EFH Acquisition contemplated by the Plan of Reorganization filed in the EFH Bankruptcy Proceedings, in September 2015, Oncor and the Purchasers in the proposed EFH Acquisition filed a joint report and application for regulatory approvals pursuant to PURA. For additional information regarding the EFH Acquisition and application for regulatory approval, see Note 2 to Financial Statements.

 

2008 Rate Review

 

In August 2009, the PUCT issued a final order with respect to our June 2008 rate review filing with the PUCT and 204 cities based on a test year ended December 31, 2007 (Docket 35717), and new rates were implemented in September 2009.  We and four other parties appealed various portions of the rate review final order to a state district court.  In January 2011, the district court signed its judgment reversing the PUCT with respect to two issues: the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  We filed an appeal with the Texas Third Court of Appeals (Austin Court of Appeals) in February 2011 with respect to the issues we appealed to the district court and did not prevail upon, as well as the district court’s decision to reverse the PUCT with respect to discounts for state colleges and universities.  In early August 2014, the Austin

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Court of Appeals reversed the district court and affirmed the PUCT with respect to the PUCT’s disallowance of certain franchise fees and the PUCT’s decision that PURA no longer requires imposition of a rate discount for state colleges and universities.  The Austin Court of Appeals also reversed the PUCT and district court’s rejection of a proposed consolidated tax savings adjustment arising out of EFH Corp.’s ability to offset our taxable income against losses from other investments and remanded the issue to the PUCT to determine the amount of the consolidated tax savings adjustment.  In late August 2014, we filed a motion on rehearing with the Austin Court of Appeals with respect to certain appeal issues on which we were not successful, including the consolidated tax savings adjustment.  In December 2014, the Austin Court of Appeals issued its opinion, clarifying that it was rendering judgment on the rate discount for state colleges and universities issue (affirming that PURA no longer requires imposition of the rate discount) rather than remanding it to the PUCT, and dismissing the motions for rehearing regarding the franchise fee issue and the consolidated tax savings adjustment.  We filed a petition for review with the Texas Supreme Court in February 2015.  The Texas Supreme Court requested full briefing on the merits, and the briefing period ended on January 25, 2016.   On February 19, 2016, the Texas Supreme Court granted the petition for review, with the date and time of oral arguments to be set at a later date.  There is no deadline for the court to act.  If our appeals efforts are unsuccessful and the proposed consolidated tax savings adjustment is implemented, we estimate that on remand, the impact on earnings of the consolidated tax savings adjustment’s value could range from zero, as originally determined by the PUCT in Docket 35717, to an approximate $135 million loss (after tax) including interest.  Interest accrues at the PUCT approved rate for over-collections which is 0.18% for 2016.  We do not believe that any of the other issues ruled upon by the Austin Court of Appeals would result in a material impact to our results of operations or financial condition.

 

We are involved in various other regulatory proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.

 

4.    INCOME TAXES

 

The components of our reported provision (benefit) in lieu of income taxes are as follows:

 

 

 

 

 

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Reconciliation of provision in lieu of income taxes computed at the US federal statutory rate to provision in lieu of income taxes:

 

 

 

The net amounts of $2.612 billion and $2.559 billion reported in the balance sheets at December 31, 2015 and 2014, respectively, as liability in lieu of deferred income taxes include amounts previously recorded as net deferred tax liabilities.  Upon the sale of equity interests to Texas Transmission and Investment LLC in 2008, we became a partnership for US federal income tax purposes, and the temporary differences that gave rise to the deferred taxes will, over time, become taxable to the equity holders.  Under a tax sharing agreement among us and our equity holders (see Note 1), we make payments to the equity holders related to income taxes when amounts would have become due to the IRS if Oncor was taxed as a corporation.  Accordingly, as the temporary differences become taxable, we will pay the equity holders.  In the unlikely event such amounts are not paid under the tax sharing agreement, it is probable that this regulatory liability will continue to be included in Oncor’s rate setting processes.

 

Accounting For Uncertainty in Income Taxes

 

Prior to November 2008, we were a member of the EFH Corp. consolidated tax group.  The examination and applicable appeals process of EFH Corp. and its subsidiaries’ federal income tax returns for the years ending prior to January 1, 2009 are complete, but final settlement of those years is not expected until EFH Corp. finalizes any claims with the IRS for those years in the bankruptcy process. Texas franchise and margin tax returns are under examination or still open for examination for tax years beginning after 2006.  Subsequent to November 2008, we are not a member of the EFH Corp. consolidated federal tax group and assess our liability for uncertain tax positions in our partnership returns.

 

In the first quarter of 2014, several uncertain tax positions were remeasured under US GAAP guidance as a result of new information received from the IRS with respect to the audit of tax years 2007 through 2009.  As a result, we reduced the liability for uncertain tax positions by $18 million.  This reduction consisted of a $16 million increase in liability in lieu of deferred income taxes and a $2 million ($1 million after tax) reversal of accrued interest, which is reported as a decrease in provision in lieu of income taxes.  In September 2014, EFH Corp. signed the final agreed Revenue Agent Report and associated documentation (RAR) for the 2007 tax year and filed and received approval of the bankruptcy court in the EFH Bankruptcy Proceedings of its signing of the RAR.  With the signing of the RAR in the third quarter of 2014, the remaining $1 million liability for uncertain tax positions with respect to tax year 2007 was released.  The reduction consisted of a $1 million reversal of provision in lieu of income taxes.  Final processing of the agreed RAR continues.  The impact related to the conclusion of the 2007 audit is a deferred tax asset of approximately $45 million that is recorded in liability in lieu of deferred income taxes.    

 

In the fourth quarter of 2014, the Department of Justice filed a claim with the bankruptcy court for open tax years through 2013 that was consistent with the settlement EFH Corp. reached with the IRS for tax years 2003 through 2006.  As a result of this filing, the 2003 through 2006 open tax years for GAAP purposes were settled and the liability for uncertain tax positions was reduced by $35 million.  The impact related to the conclusion of the 2003 through 2006 audit is  approximately $11 million and is recorded as a deferred tax asset in liability in lieu of deferred income taxes.

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In the second quarter of 2015, EFH Corp. received the final RAR and associated documentation for the 2008 tax year which includes the results of Oncor.  In addition, we received the final RAR and associated documentation for tax years 2008 and 2009 in which we filed a partnership tax return.  The RARs reflect additional deductions for Oncor resulting in approximately $8 million in tax refunds from our members.  Of this amount, $4 million is related to pre-partnership formation and is recorded as a deferred tax asset in liability in lieu of deferred income taxes and $4 million is related to post-partnership formation and was collected during the third quarter of 2015.

 

The following table summarizes the changes to the uncertain tax positions reported in other noncurrent liabilities in our consolidated balance sheet during the years ended December 31, 2015, 2014 and 2013:

 

 

 

 

Of the balances at both December 31, 2015 and 2014,  $3 million represents tax positions for which the uncertainty relates to the timing of recognition for tax purposes.  The disallowance of such positions would not affect the effective tax rate, but would accelerate the payment of cash under the tax sharing agreement to an earlier period. 

 

Noncurrent liabilities included no accrued interest related to uncertain tax positions at December 31, 2015 and 2014.  There were no amounts recorded related to interest and penalties in the year ended December 31, 2015 and  benefits of $1 million and $15 million for the years ended December 31, 2014 and 2013, respectively (all amounts after tax).  The federal income tax benefit on the interest accrued on uncertain tax positions is recorded as liability in lieu of deferred income taxes.

 

 

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5.    REGULATORY ASSETS AND LIABILITIES

 

Recognition of regulatory assets and liabilities and the amortization periods over which they are expected to be recovered or refunded through rate regulation reflect the decisions of the PUCT.  Components of our regulatory assets and liabilities are provided in the table below.  Amounts not earning a return through rate regulation are noted.

 

 

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In August 2011, the PUCT issued a final order in our rate review filed in January 2011.  The rate review included a determination of the recoverability of regulatory assets at June 30, 2010, including the recoverability period of those assets deemed allowable by the PUCT.

 

In accordance with the PUCT’s August 2009 order in our rate review, the remaining net book value and the approved amount of removal cost of existing conventional meters that were replaced by advanced meters are being charged to depreciation and amortization expense over an 11-year cost recovery period.

 

In September 2008, the PUCT approved a settlement for us to recover our estimated future investment for advanced metering deployment.  We began billing the AMS surcharge in the January 2009 billing month cycle.  The surcharge is expected to total $1.023 billion over the 11-year recovery period and includes a cost recovery factor of $2.19 per month per residential retail customer and $2.39 to $5.15 per month for non-residential retail customers.  We account for the difference between the surcharge billings for advanced metering facilities and the allowable revenues under the surcharge provisions, which are based on expenditures and an allowed return, as a regulatory asset or liability.  Such differences arise principally as a result of timing of expenditures or cost increases.  As indicated in the table above, the regulatory asset at December 31, 2015 and 2014 totaled $164 million and $113 million, respectively.

 

As a result of purchase accounting, in 2007 the carrying value of certain generation-related regulatory assets securitized by transition bonds, which have been reviewed and approved by the PUCT for recovery but without earning a rate of return, was reduced by $213 million.  This amount is being accreted to other income over the recovery period that was remaining at October 10, 2007 (approximately nine years) which ends in 2016. 

 

See Note 12 for information regarding nuclear decommissioning cost recovery.

 

6.    BORROWINGS UNDER CREDIT FACILITIES

 

At December 31, 2015, we had a secured revolving credit facility to be used for working capital and general corporate purposes, issuances of letters of credit and support for any commercial paper issuances.    In October 2015, we exercised one of the two one-year extensions available to us and extended the term of the revolving credit facility to October 2017.  Also in October 2015, we exercised our option to permanently reduce the loan commitment available under the revolving credit facility from $2.4 billion to $2.0 billion.  The terms of the revolving credit facility allow us to request an increase in our borrowing capacity of $100 million in the aggregate and/or a  one-year extension, provided certain conditions are met, including lender approval.

 

Borrowings under the revolving credit facility are classified as short-term on the balance sheet and are secured equally and ratably with all of our other secured indebtedness by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.

 

At December 31, 2015, we had outstanding borrowings under the revolving credit facility totaling $840 million with an interest rate of 1.48% and outstanding letters of credit totaling $7 million.  At December 31, 2014, we had outstanding borrowings under the revolving credit facility totaling $711 million with an interest rate of 1.29% and outstanding letters of credit totaling $7 million. 

 

Borrowings under the revolving credit facility bear interest at per annum rates equal to, at our option, (i) LIBOR plus a spread ranging from 1.00% to 1.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt or (ii) an alternate base rate (the highest of (1) the prime rate of JPMorgan Chase, (2) the federal funds effective rate plus 0.50%, and (3) daily one-month LIBOR plus 1.00%) plus a spread ranging from 0.00% to 0.75% depending on credit ratings assigned to our senior secured non-credit enhanced long-term debt.  At December 31, 2015, all outstanding borrowings bore interest at LIBOR plus 1.125%.  Amounts borrowed under the facility, once repaid, can be borrowed again from time to time.

 

An unused commitment fee is payable quarterly in arrears and upon termination or commitment reduction at a rate equal to 0.100% to 0.275% (such spread depending on certain credit ratings assigned to our senior secured debt) of the daily unused commitments under the revolving credit facility.  Letter of credit fees on the stated amount of letters of credit issued under the revolving credit facility are payable to the lenders quarterly in arrears and upon termination at a rate per annum equal to the spread over adjusted LIBOR.  Customary fronting and administrative fees are also payable to letter of

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credit fronting banks.  At December 31, 2015, letters of credit bore interest at 1.325%, and a commitment fee (at a rate of 0.125% per annum) was payable on the unfunded commitments under the facility, each based on our current credit ratings.

 

Under the terms of our revolving credit facility, the commitments of the lenders to make loans to us are several and not joint.  Accordingly, if any lender fails to make loans to us, our available liquidity could be reduced by an amount up to the aggregate amount of such lender’s commitments under the facility.

 

Subject to the limitations described below, borrowing capacity available under the credit facility at December 31, 2015 and 2014 was $1.153 billion and $1.682 billion, respectively.  Generally, our indentures and revolving credit facility limit the incurrence of other secured indebtedness except for indebtedness secured equally and ratably with the indentures and revolving credit facility and certain permitted exceptions.  As described further in Note 7, the Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust.  At December 31, 2015, the available borrowing capacity of the revolving credit facility could be fully drawn.

 

The revolving credit facility contains customary covenants for facilities of this type, restricting, subject to certain exceptions, us and our subsidiaries from, among other things: incurring additional liens; entering into mergers and consolidations; and sales of substantial assets.  In addition, the revolving credit facility requires that we maintain a consolidated senior debt-to-capitalization ratio of no greater than 0.65 to 1.00 and observe certain customary reporting requirements and other affirmative covenants.  For purposes of the ratio, debt is calculated as indebtedness defined in the revolving credit facility (principally, the sum of long-term debt, any capital leases, short-term debt and debt due currently in accordance with US GAAP).  The debt calculation excludes transition bonds issued by Bondco, but includes the unamortized fair value discount related to Bondco.  Capitalization is calculated as membership interests determined in accordance with US GAAP plus indebtedness described above.  At December 31, 2015, we were in compliance with this covenant with a debt-to-capitalization ratio of 0.46 to 1.00 and with all other covenants.

 

 

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7.    LONG-TERM DEBT

 

At December 31, 2015 and 2014, our long-term debt consisted of the following:

 

 

 

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(a)Secured by first priority lien on certain transmission and distribution assets equally and ratably with all of Oncor’s other secured indebtedness.  See “Deed of Trust” below for additional information.

(b)The transition bonds are nonrecourse to Oncor and were issued to securitize a regulatory asset.

 

 

Debt-Related Activity in 2015

 

Debt Repayments

 

Repayments of long-term debt in 2015 totaled $639 million consisting of $500 million aggregate principal amount of 6.375% senior secured notes paid at the scheduled maturity date of January 15, 2015 and $139 million of transition bond principal payments at scheduled maturity dates.

 

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Issuance of New Senior Secured Notes

 

In March 2015, we issued $350 million aggregate principal amount of 2.950% senior secured notes maturing in April 2025 (2025 Notes) and $375 million aggregate principal amount of 3.750% senior secured notes maturing in April 2045 (2045 Notes, and together with the 2025 Notes, the Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $714 million from the sale of the Notes to repay borrowings under our revolving credit facility and for other general corporate purposes.  The Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.

 

Interest on the Notes is payable in cash semiannually in arrears on April 1 and October 1 of each year, beginning on October 1, 2015.  Prior to January 1, 2025, in the case of the 2025 Notes, and October 1, 2044, in the case of the 2045 Notes, we may at our option at any time redeem all or part of the Notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest and a make-whole premium.  On and after January 1, 2025, in the case of the 2025 Notes, and October 1, 2044, in the case of the 2045 Notes, Oncor may redeem the Notes at any time, in whole or in part, at a redemption price equal to 100% of the principal amount of such Notes, plus accrued and unpaid interest. The Notes also contain customary events of default, including failure to pay principal or interest on the Notes when due.

 

The Notes were issued in a private placement.  In October 2015 we completed an offering with the holders of the Notes to exchange their respective Notes for notes that have terms identical in all material respects to the Notes (Exchange Notes), except that the Exchange Notes do not contain terms with respect to transfer restrictions, registration rights and payment of additional interest for failure to observe certain obligations in a certain registration rights agreement.  The Exchange Notes were registered on a Form S-4, which was declared effective in September 2015.

 

Debt-Related Activity in 2014

 

Debt Repayments

 

Repayments of long-term debt in 2014 totaled $131 million and represent transition bond principal payments at scheduled maturity dates.

 

Issuance of New Senior Secured Notes

 

In May 2014, we issued $250 million aggregate principal amount of 2.150% senior secured notes maturing in June 2019 (2019 Notes).  We used the proceeds (net of the initial purchasers’ discount, fees and expenses) of approximately $248 million from the sale of the 2019 Notes to repay borrowings under our revolving credit facility and for other general corporate purposes.  The 2019 Notes are secured by a first priority lien, and are secured equally and ratably with all of our other secured indebtedness.

 

Interest on the 2019 Notes is payable in cash semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2014.  We may at our option redeem the 2019 Notes, in whole or in part, at any time, at a price equal to 100% of their principal amount, plus accrued and unpaid interest and, until May 1, 2019, a make-whole premium.  The 2019 Notes also contain customary events of default, including failure to pay principal or interest on the 2019 Notes when due.

 

The 2019 Notes were issued in a private placement.  In December 2014 we completed an offering with the holders of the 2019 Notes to exchange their respective 2019 Notes for notes that have terms identical in all material respects to the Notes (2019 Exchange Notes), except that the 2019 Exchange Notes do not contain terms with respect to transfer restrictions, registration rights and payment of additional interest for failure to observe certain obligations in a certain registration rights agreement.  The 2019 Exchange Notes were registered on a Form S-4, which was declared effective in November 2014.

 

Deed of Trust

 

Our secured indebtedness, including the revolving credit facility described in Note 6, is secured equally and ratably by a first priority lien on property we acquired or constructed for the transmission and distribution of electricity.  The property is mortgaged under the Deed of Trust.  The Deed of Trust permits us to secure indebtedness (including borrowings under our revolving credit facility) with the lien of the Deed of Trust up to the aggregate of (i) the amount of

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available bond credits, and (ii) 85% of the lower of the fair value or cost of certain property additions that could be certified to the Deed of Trust collateral agent.  At December 31, 2015, the amount of available bond credits was approximately $2.577 billion and the amount of future debt we could secure with property additions, subject to those property additions being certified to the Deed of Trust collateral agent, was $1.261 billion.

 

Maturities

 

Long-term debt maturities at December 31, 2015, are as follows:

 

 

Fair Value of Long-Term Debt

 

At December 31, 2015 and 2014, the estimated fair value of our long-term debt (including current maturities) totaled $6.287 billion and $6.844 billion, respectively, and the carrying amount totaled $5.687 billion and $5.603 billion, respectively.  The fair value is estimated using observable market data, representing Level 2 valuations under accounting standards related to the determination of fair value.

 

8.    COMMITMENTS AND CONTINGENCIES

 

EFH Bankruptcy Proceedings

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  See Notes 2 and 12 for a discussion of the potential impacts on us as a result of the EFH Bankruptcy Proceedings and our related-party transactions involving members of the Texas Holdings Group, respectively.

 

Leases

 

At December 31, 2015, our future minimum lease payments under operating leases (with initial or remaining noncancelable lease terms in excess of one year) were as follows:

 

 

 

 

Rent charged to operation and maintenance expense totaled $8 million, $9 million and $10 million for the years ended December 31, 2015, 2014 and 2013, respectively.

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Efficiency Spending

 

We are required to annually invest in programs designed to improve customer electricity demand efficiencies to satisfy ongoing regulatory requirements.  The 2016 requirement is $61 million.

 

Legal/Regulatory Proceedings

 

We are involved in various legal and administrative proceedings in the normal course of business, the ultimate resolution of which, in the opinion of management, should not have a material effect upon our financial position, results of operations or cash flows.  See Note 3 for additional information regarding contingencies.

 

Labor Contracts

 

At December 31, 2015, approximately 19% of our full time employees were represented by a labor union and covered by a collective bargaining agreement with an expiration date of October 25, 2017.

 

Environmental Contingencies

 

We must comply with environmental laws and regulations applicable to the handling and disposal of hazardous waste.  We are in compliance with all current laws and regulations; however, the impact, if any, of changes to existing regulations or the implementation of new regulations is not determinable.  The costs to comply with environmental regulations can be significantly affected by the following external events or conditions:

 

 

9.    MEMBERSHIP INTERESTS

 

Cash Distributions

 

Distributions are limited by our required regulatory capital structure to be at or below the assumed debt-to-equity ratio established periodically by the PUCT for ratemaking purposes, which is currently set at 60% debt to 40% equity.  At December 31, 2015,  $30 million was available for distribution to our members as our regulatory capitalization ratio was 59.8% debt and 40.2% equity.  The PUCT has the authority to determine what types of debt and equity are included in a utility’s debt-to-equity ratio.  For purposes of this ratio, debt is calculated as long-term debt plus unamortized gains on reacquired debt less unamortized issuance expenses, premiums and losses on reacquired debt.  The debt calculation excludes transition bonds issued by Bondco.  Equity is calculated as membership interests determined in accordance with US GAAP, excluding the effects of purchase accounting (which included recording the initial goodwill and fair value adjustments and the subsequent related impairments and amortization). 

 

On February 24, 2016, our board of directors declared a cash distribution of $56 million, which was paid to our members on February 25, 2016.

 

During 2015,  our board of directors declared, and we paid, the following cash distributions to our members:

 

 

 

During 2014, our board of directors declared, and we paid, the following cash distributions to our members:

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

The following table presents the changes to accumulated other comprehensive income (loss) for the years ended December 31, 2015, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

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10.    PENSION AND OTHER POSTRETIREMENT EMPLOYEE BENEFITS (OPEB) PLANS

 

Regulatory Recovery of Pension and OPEB Costs

 

PURA provides for our recovery of pension and OPEB costs applicable to services of our active and retired employees, as well as services of other EFH Corp. active and retired employees prior to the deregulation and disaggregation of EFH Corp.’s electric utility businesses effective January 1, 2002 (recoverable service).  Accordingly, we entered into an agreement with EFH Corp. whereby we assumed responsibility for applicable pension and OPEB costs related to those personnel’s recoverable service. 

 

We are authorized to establish a regulatory asset or liability for the difference between the amounts of pension and OPEB costs approved in current billing rates and the actual amounts that would otherwise have been recorded as charges or credits to earnings related to recoverable service.  Amounts deferred are ultimately subject to regulatory approval.  At December 31, 2015 and 2014, we had recorded regulatory assets totaling $1.182 billion and $1.166 billion, respectively, related to pension and OPEB costs, including amounts related to deferred expenses as well as amounts related to unfunded liabilities that otherwise would be recorded as other comprehensive income.

 

We have also assumed primary responsibility for pension benefits of a closed group of retired and terminated vested plan participants not related to our regulated utility business (non-recoverable service) in a 2012 transaction. Any retirement costs associated with non-recoverable service is not recoverable through rates. 

 

Pension Plans

 

We participate in and have liabilities under the Oncor Retirement Plan and the EFH Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (Code), and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  These pension plans provide benefits to participants under one of two formulas: (i) a Cash Balance Formula under which participants earn monthly contribution credits based on their compensation and a combination of their age and years of service, plus monthly interest credits or (ii) a Traditional Retirement Plan Formula based on years of service and the average earnings of the three years of highest earnings.  The interest component of the Cash Balance Formula is variable and is determined using the yield on 30-year Treasury bonds.  Under the Cash Balance Formula, future increases in earnings will not apply to prior service costs.

 

All eligible employees hired after January 1, 2001 participate under the Cash Balance Formula.  Certain employees, who, prior to January 1, 2002, participated under the Traditional Retirement Plan Formula, continue their participation under that formula.  It is the sponsors’ policy to fund the plans on a current basis to the extent required under existing federal tax and ERISA regulations.

 

We also have the Supplemental Retirement Plan for certain employees whose retirement benefits cannot be fully earned under the qualified retirement plan, the information for which is included below.

 

OPEB Plan

 

Until July 1, 2014, we participated with EFH Corp. and other subsidiaries of EFH Corp. to offer certain health care and life insurance benefits to eligible employees and their eligible dependents upon the retirement of such employees (EFH OPEB Plan).  As discussed below, we ceased participation in the EFH OPEB Plan and established our own OPEB plan for our eligible retirees, certain eligible retirees of EFH Corp. for whom we have OPEB liability with respect to their regulated service, and their dependents (Oncor OPEB Plan).  For employees retiring on or after January 1, 2002, the retiree contributions required for such coverage vary based on a formula depending on the retiree’s age and years of service.

 

In April 2014, we entered into an agreement with EFH Corp. in which we agreed to transfer to the Oncor OPEB Plan effective July 1, 2014, the assets and liabilities related to our eligible current and future retirees as well as certain eligible retirees of EFH Corp. whose employment included service with both Oncor (or a predecessor regulated electric business) and a non-regulated business of EFH Corp.  Pursuant to the agreement, EFH Corp. will retain its portion of the liability for retiree benefits related to those retirees.  Since the Oncor OPEB Plan offers identical coverages as the EFH OPEB Plan and we and EFH Corp. retain the same responsibility for participants as before, there was no financial impact as a result of the transfer other than from a remeasurement of the Oncor OPEB Plan’s asset values and obligations.  As we are not

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responsible for EFH Corp.’s portion of the Oncor OPEB Plan’s unfunded liability totaling $90 million as of December 31, 2015, that amount is not reported on our balance sheet.

 

Pension and OPEB Costs Recognized as Expense

 

Pension and OPEB amounts provided herein include amounts related only to our portion of the various plans based on actuarial computations and reflect our employee and retiree demographics as described above.  Our net costs related to pension and OPEB plans for the years ended December 31, 2015, 2014 and 2013 were comprised of the following:

 

 

 

 

 

We and EFH Corp. use the calculated value method to determine the market-related value of the assets held in the trust for purposes of calculating our pension costs.  We and EFH Corp. include the realized and unrealized gains or losses in the market-related value of assets over a rolling four-year period.  Each year, 25% of such gains and losses for the current year and for each of the preceding three years is included in the market-related value.  Each year, the market-related value of assets is increased for contributions to the plan and investment income and is decreased for benefit payments and expenses for that year.

 

We and EFH Corp. use the fair value method to determine the market-related value of the assets held in the trust for purposes of calculating OPEB cost.

 

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Detailed Information Regarding Pension and OPEB Benefits

 

The following pension and OPEB information is based on December 31, 2015, 2014 and 2013 measurement dates:

 

 

 

_______________

(a)As a result of the transfer of OPEB plan assets and liabilities from the EFH OPEB Plan to the Oncor OPEB Plan discussed above, the discount rate reflected in OPEB costs for January through June 2014 was 4.98% and for July through December 2014 was 4.39%.

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The following tables provide information regarding the assumed health care cost trend rates.

 

 

 

 

The following table provides information regarding pension plans with projected benefit obligations (PBO) and accumulated benefit obligations (ABO) in excess of the fair value of plan assets.

 

 

 

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Pension and OPEB Plans Investment Strategy and Asset Allocations

 

Our investment objective for the retirement plans is to invest in a suitable mix of assets to meet the future benefit obligations at an acceptable level of risk, while minimizing the volatility of contributions.  Equity securities are held to achieve returns in excess of passive indexes by participating in a wide range of investment opportunities.  International equity,  real estate securities and credit strategies (high yield bonds, emerging market debt and bank loans) are used to further diversify the equity portfolio.  International equity securities may include investments in both developed and emerging international markets.  Fixed income securities include primarily corporate bonds from a diversified range of companies, US Treasuries and agency securities and money market instruments.  Our investment strategy for fixed income investments is to maintain a high grade portfolio of securities, which assists us in managing the volatility and magnitude of plan contributions and expense while maintaining sufficient cash and short-term investments to pay near-term benefits and expenses.

The Oncor Retirement Plan’s investments are managed in two pools: one pool associated with the recoverable service portion of plan obligations related to Oncor’s regulated utility business, and a second pool associated with the non-recoverable service portion of plan obligations not related to Oncor’s regulated utility business.  Each pool is invested in a broadly diversified portfolio of equity, fixed income securities, credit strategies and real estate.  The second pool represents about 32% of total investments at December 31, 2015.

 

The target asset allocation ranges of the pension plans investments by asset category are as follows:

 

 

 

Our investment objective for the OPEB plan primarily follows the objectives of the pension plans discussed above, while maintaining sufficient cash and short-term investments to pay near-term benefits and expenses.  The actual amounts at December 31, 2015 provided below are consistent with the asset allocation targets.

 

Fair Value Measurement of Pension Plans Assets

 

At December 31, 2015 and 2014, pension plans assets measured at fair value on a recurring basis consisted of the following:

 

 

_____________

(a)Substantially all corporate bonds are rated investment grade by a major ratings agency such as Moody’s.

(b)Other consists primarily of municipal bonds, emerging market debt, bank loans and fixed income derivative instruments.

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There was no significant change in the fair value of Level 3 assets in the periods presented.

 

Fair Value Measurement of OPEB Plan Assets

 

At December 31, 2015 and 2014, OPEB plan assets measured at fair value on a recurring basis consisted of the following:

 

 

 

_____________

(a)Substantially all corporate bonds are rated investment grade by a major ratings agency such as Moody’s.

(b)Other consists primarily of diversified bond mutual funds.

 

Expected Long-Term Rate of Return on Assets Assumption

 

The retirement plans’ strategic asset allocation is determined in conjunction with the plans’ advisors and utilizes a comprehensive Asset-Liability modeling approach to evaluate potential long-term outcomes of various investment strategies.  The modeling incorporates long-term rate of return assumptions for each asset class based on historical and future expected asset class returns, current market conditions, rate of inflation, current prospects for economic growth, and taking into account the diversification benefits of investing in multiple asset classes and potential benefits of employing active investment management.

 

 

 

_____________

(a)The 2016 expected long-term rate of return for the nonregulated portion of the Oncor Retirement Plan is 4.97%.

 

Significant Concentrations of Risk

 

The plans’ investments are exposed to risks such as interest rate, capital market and credit risks.  We and EFH Corp. seek to optimize return on investment consistent with levels of liquidity and investment risk which are prudent and reasonable, given prevailing capital market conditions and other factors specific to participating employers.  While we and EFH Corp. recognize the importance of return, investments will be diversified in order to minimize the risk of large losses unless, under the circumstances, it is clearly prudent not to do so.  There are also various restrictions and guidelines in

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place including limitations on types of investments allowed and portfolio weightings for certain investment securities to assist in the mitigation of the risk of large losses.

 

Assumed Discount Rate

 

For the Oncor retirement plans at December 31, 2015, we selected the assumed discount rate using the Aon Hewitt AA-AAA Bond Universe yield curve, which is based on corporate bond yields and at December 31, 2015 consisted of  1,150 corporate bonds with an average rating of AA and AAA using Moody’s, S&P and Fitch ratings.  For the Oncor OPEB Plan and the EFH Retirement Plan at December 31, 2015, we and EFH Corp., respectively, selected the assumed discount rate using the Aon Hewitt AA Above Median yield curve, which is based on corporate bond yields and at December 31, 2015 consisted of 434 corporate bonds with an average rating of AA using Moody’s, S&P and Fitch ratings.

 

Amortization in 2016

 

In 2016, amortization of the net actuarial loss and prior service credit for the defined benefit pension plans from regulatory assets and other comprehensive income into net periodic benefit cost is expected to be $41 million and a  less than $1 million credit, respectively.  Amortization of the net actuarial loss and prior service credit for the OPEB plan from regulatory assets into net periodic benefit cost is expected to be $35 million and a $20 million credit, respectively.

 

Pension and OPEB Plans Cash Contributions

 

Our contributions to the benefit plans were as follows:

 

 

 

Our funding for the pension plans and the Oncor OPEB Plan is expected to total $4 million and $30 million, respectively in 2016 and approximately $441 million and $152 million, respectively, in the 2016 to 2020 period.

 

Future Benefit Payments

 

Estimated future benefit payments to beneficiaries are as follows:

 

 

 

 

Thrift Plan

 

Our employees are eligible to participate in a qualified savings plan, a participant-directed defined contribution plan intended to qualify under Section 401(a) of the Code, and is subject to the provisions of ERISA.  Under the plan, employees may contribute, through pre-tax salary deferrals and/or after-tax applicable payroll deductions, a portion of their regular salary or wages as permitted under law.  Employer matching contributions are made in an amount equal to 100% of the first 6% of employee contributions for employees who are covered under the Cash Balance Formula of the Oncor Retirement Plan, and 75% of the first 6% of employee contributions for employees who are covered under the Traditional Retirement Plan Formula of the Oncor Retirement Plan.  Employer matching contributions are made in cash and may be allocated by participants to any of the plan's investment options. 

 

Until January 1, 2015, the thrift plan in which our eligible employees were able to participate was sponsored by EFH Corp. (EFH Thrift Plan).  Our contributions to the EFH Thrift Plan totaled $13 million for both years ended December 31, 2014 and 2013.  Effective January 1, 2015, the accounts of Oncor participants were transferred from the EFH Thrift Plan to an Oncor-sponsored spin-off of the EFH Thrift Plan (Oncor Thrift Plan).  Our contributions to the Oncor Thrift Plan totaled $14 million for the year ended December 31, 2015.  Our matching contributions are the same under the Oncor

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Thrift Plan as they were under the EFH Thrift Plan at the time of the transfer.  Since the Oncor Thrift Plan offers identical benefits to our employees, transfer to the Oncor Thrift Plan is not expected to have an impact on our results of operations, financial condition or cash flows.

 

11.   STOCK-BASED COMPENSATION

 

We currently do not offer stock-based compensation to our employees or directors.  In 2008, we established the SARs Plan under which certain of our executive officers and key employees were granted stock appreciation rights payable in cash, or in some circumstances, Oncor membership interests.  In February 2009, we established the Oncor Electric Delivery Company LLC Director Stock Appreciation Rights Plan (the Director SARs Plan) under which certain non-employee members of our board of directors and other persons having a relationship with us were granted SARs payable in cash, or in some circumstances, Oncor membership interests.

 

In November 2012, we accepted the early exercise of all outstanding SARs (both vested and unvested) issued to date pursuant to both SARs Plans.    As part of the 2012 early exercise of SARs we began accruing interest on dividends declared with respect to the SARs.  Under both SARs plans, dividends that were paid in respect of Oncor membership interests while the SARs were outstanding were credited to the SARs holder’s account as if the SARs were units, payable upon the earliest to occur of death, disability, separation from service, unforeseeable emergency, a change in control, or the occurrence of an event triggering SAR exercisability pursuant to Section 5(c)(ii) of the SARs Plan.  As a result, at December 31, 2015 we have recorded a liability of approximately $10 million relating to SARS dividend accruals.   For accounting purposes, the liability is discounted based on an employee’s or director’s expected retirement date. We recognized approximately $1 million, $1 million and $2 million in accretion and interest with respect to such dividends in 2015, 2014 and 2013, respectively.

 

12.   RELATED-PARTY TRANSACTIONS

 

The following represent our significant related-party transactions and related matters.  See Note 2 for additional information regarding related-party contingencies resulting from the EFH Bankruptcy Proceedings.

 

 

Trade accounts and other receivables from EFH Corp. affiliates – net reported on our balance sheet, primarily consisting of trade receivables from TCEH related to these electricity delivery fees, are as follows:

 

 

 

 

 

 

 

Amounts payable to (receivable from) members related to income taxes under the agreement and reported on our balance sheet consisted of the following:

 

 

 

Cash payments made to (received from) members related to income taxes consisted of the following:

 

 

______________

 

 

 

 

See Notes 4,  9 and 10 for information regarding the tax sharing agreement, distributions to members and our participation in EFH Corp. pension and OPEB plans, respectively.

 

 

13.   SUPPLEMENTARY FINANCIAL INFORMATION

 

Variable Interest Entities

 

We are the primary beneficiary and consolidate a wholly-owned VIE, Bondco, which was organized for the limited purpose of issuing specific transition bonds and purchasing and owning transition property acquired from us that is pledged as collateral to secure the bonds.  We act as the servicer for this entity to collect transition charges authorized by the PUCT.  These funds are remitted to the trustee and used for interest and principal payments on the transition bonds and related costs.

 

The material assets and liabilities of Bondco are presented separately on the face of our Consolidated Balance Sheet because the assets are restricted and can only be used to settle the obligations of Bondco, and Bondco’s creditors do not have recourse to our general credit or assets.

 

Our maximum exposure does not exceed our equity investment in Bondco, which was $14 million and $16 million at December 31, 2015 and 2014, respectively.  We did not provide any financial support to Bondco during the years ended December 31, 2015 and 2014.

 

Major Customers

 

Revenues from TCEH represented 25%,  25% and 27% of our total operating revenues for the years ended December 31, 2015, 2014 and 2013, respectively.  Revenues from REP subsidiaries of a nonaffiliated entity, collectively represented 17%,  16% and 15% of total operating revenues for each of the years ended December 31, 2015, 2014 and 2013, respectively.  No other customer represented 10% or more of our total operating revenues.

 

Other Income and Deductions

 

 

 

 

Interest Expense and Related Charges

 

 

 

Restricted Cash

 

Restricted cash amounts reported on our balance sheet consisted of the following:

 

 

 

Trade Accounts and Other Receivables

 

Trade accounts and other receivables reported on our balance sheet consisted of the following:

 

 

 

At December 31, 2015 and 2014, REP subsidiaries of a nonaffiliated entity collectively represented approximately 13% and 12%, respectively, of the nonaffiliated trade accounts receivable amount.    

 

Under a PUCT rule relating to the Certification of Retail Electric Providers, write-offs of uncollectible amounts owed by REPs are deferred as a regulatory asset.  Due to commitments made to the PUCT in 2007, we are not allowed to recover bad debt expense, or certain other costs and expenses, from ratepayers in the event of a default or bankruptcy by an affiliate REP.

 

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Investments and Other Property

 

Investments and other property reported on our balance sheet consisted of the following:

 

 

 

The majority of these assets represent cash surrender values of life insurance policies that are purchased to fund liabilities under deferred compensation plans.  At December 31, 2015 and 2014, the face amount of these policies totaled $155 million and $167 million, respectively, and the net cash surrender values (determined using a Level 2 valuation technique) totaled $76 million and $76 million, respectively.  Changes in cash surrender value are netted against premiums paid.  Other investment assets held to satisfy deferred compensation liabilities are recorded at market value.

 

Property, Plant and Equipment

 

Property, plant and equipment reported on our balance sheet consisted of the following:

 

 

 

Depreciation expense as a percent of average depreciable property approximated 3.6%,  3.6% and 3.7% for the years ended December 31, 2015, 2014 and 2013, respectively.

 

Intangible Assets

 

Intangible assets (other than goodwill) reported on our balance sheet consisted of the following:

 

 

 

 

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Aggregate amortization expense for intangible assets totaled $64 million,  $58 million and $53 million for each of the years ended December 31, 2015, 2014 and 2013, respectively.  At December 31, 2015, the weighted average remaining useful lives of capitalized land easements and software were 84 years and 3 years, respectively.  The estimated aggregate amortization expense for each of the next five fiscal years is as follows:

 

 

 

 

At both December 31, 2015 and 2014, goodwill totaling $4.1 billion was reported on our balance sheet.  None of this goodwill is being deducted for tax purposes.  See Note 1 regarding goodwill impairment assessment and testing.

 

Employee Benefit Obligations and Other

 

Employee benefit obligations and other reported on our balance sheet consisted of the following:

 

 

 

Supplemental Cash Flow Information 

 

 

 

 

 

______________

(a)Represents end-of-period accruals.

 

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Quarterly Information (unaudited)

 

Results of operations by quarter for the years ended December 31, 2015 and 2014 are summarized below.  In our opinion, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of such amounts have been made.  Quarterly results are not necessarily indicative of a full year’s operations because of seasonal and other factors.

 

 

 

 

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Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

Item 9A.CONTROLS AND PROCEDURES

 

An evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of the disclosure controls and procedures in effect at December 31, 2015.  Based on the evaluation performed, our management, including the principal executive officer and principal financial officer, concluded that the disclosure controls and procedures were effective.  There has been no change in our internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

ONCOR ELECTRIC DELIVERY COMPANY LLC

MANAGEMENT’S ANNUAL REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Oncor Electric Delivery Company LLC is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) for the company. Oncor Electric Delivery Company LLC’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition or the deterioration of compliance with procedures or policies.

 

The management of Oncor Electric Delivery Company LLC performed an evaluation as of December 31, 2015 of the effectiveness of the company’s internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO’s) Internal Control - Integrated Framework (2013). Based on the review performed, management believes that as of December 31, 2015 Oncor Electric Delivery Company LLC's internal control over financial reporting was effective.

 

The independent registered public accounting firm of Deloitte & Touche LLP as auditors of the consolidated financial statements of Oncor Electric Delivery Company LLC has issued an attestation report on Oncor Electric Delivery Company LLC’s internal control over financial reporting.

 

 

 

 

February 25, 2016

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Members of Oncor Electric Delivery Company LLC

Dallas, Texas

 

We have audited the internal control over financial reporting of Oncor Electric Delivery Company LLC and subsidiary (the "Company") as of December 31, 2015 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company's ring-fencing measures.

 

 

 

/s/ Deloitte & Touche LLP

 

Dallas, Texas

February 25, 2016 

 

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Item 9B.OTHER INFORMATION

 

None.

 

 

 

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PART III

 

Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors

 

The names of our directors and information about them, as furnished by the directors themselves, are set forth below:

 

 

 

Director Appointments

Pursuant to our Limited Liability Company Agreement, the Sponsor Group (through Oncor Holdings) has a right to designate two individuals to serve on our board of directors. Mr. Ferguson, a managing director of Goldman, Sachs & Co., is a manager of the sole general partner of Texas Holdings and was designated to serve on our board of directors by Oncor Holdings, at the direction of EFIH. Until January 2015, Jeffrey Liaw served as a member of our board of directors. Mr. Liaw was designated to serve on our board of directors by Oncor Holdings, at the direction of EFIH. He is a former principal of TPG and manager of the sole general partner of Texas Holdings. Mr. Liaw submitted his resignation from our board of directors to the Company in January 2015 and in March 2015 Oncor Holdings, at the direction of EFIH designated Mr. Youngblood, a director of EFH Corp., as his replacement. Our Limited Liability Company Agreement also grants Texas Transmission the right to designate two individuals to serve on our board of directors. Rhys Evenden, an officer of

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GICSI and Steven J. Zucchet, an officer of Borealis, were each designated to serve on our board of directors by Texas Transmission. Both GICSI and Borealis are affiliates of Texas Transmission. Directors appointed by the Sponsor Group and Texas Transmission are referred to as member directors.

 

Our Limited Liability Company Agreement also provides that seven of our directors will be independent directors under the standards set forth in Section 303A of the New York Stock Exchange Manual and other standards in our Limited Liability Company Agreement, and that two of those independent directors will be special independent directors under the standards set forth in our Limited Liability Company Agreement. See “Certain Relationships and Related Transactions, and Director Independence — Director Independence” for a discussion of the independent director and special independent director qualifications. Our board of directors has determined that Messrs. Adams, Dunning, Estrada, Gary, Hill, Mack and Wortham are independent directors and that each of Messrs. Gary and Hill qualifies as a special independent director. Independent directors are appointed by the nominating committee of Oncor’s Holdings’ board of directors. The nominating committee of Oncor Holdings is required to consist of a majority of independent directors.

 

The board of directors of the sole member of Oncor Holdings has the right, pursuant to the terms of our Limited Liability Company Agreement, to designate one director that is an officer of Oncor. Mr. Shapard, our Chief Executive, serves as this director.

 

Audit Committee

 

The Audit Committee is a separately-designated standing audit committee, established in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. Our Audit Committee is composed of Messrs. Estrada, Evenden, Gary and Youngblood. Each of Messrs. Estrada and Gary is an “audit committee financial expert” as defined in Item 407(d)(5) of SEC Regulation S-K. Messrs. Estrada and Gary are independent directors under the standards set forth in our Limited Liability Company Agreement. Mr. Evenden is a member director appointed by Texas Transmission and Mr. Youngblood is a member director appointed by Oncor Holdings, at the direction of EFIH.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Executive Officers

 

The names of our executive officers and information about them, as furnished by the executive officers themselves, are set forth below:

 

 

There is no family relationship between any of our executive officers, between any of our directors, or between any executive officer and any director.

 

Code of Conduct

 

We maintain certain corporate governance documents on our website at www.oncor.com.  Our Code of Conduct can be accessed by selecting “Corporate Governance” under the “Investors” tab on the website.  Our Code of Conduct applies to all of our employees and officers, including our Chief Executive, Chief Operating Officer, Chief Financial Officer and Controller, and it also applies to our directors, except for provisions pertinent only to employees.  Any amendments to our Code of Conduct will be posted on our website promptly. Printed copies of the corporate governance documents that are posted on our website are available to any person without charge upon written request to the Corporate Secretary of Oncor Electric Delivery Company LLC at 1616 Woodall Rodgers Freeway, Suite 7E-002, Dallas, Texas 75202-1234.

   

 

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Item 11.EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview

 

Our board of directors has designated an Organization and Compensation Committee of the board of directors (O&C Committee) to establish and assess our executive compensation policies, which include participation in various employee benefit programs.  The O&C Committee met nine times in 2015.

 

The responsibilities of the O&C Committee include:

 

 

The O&C Committee conducts reviews of the level of individual compensation elements as well as total direct compensation for our executive officers, including the executive officers named in the Summary Compensation Table below (collectively with the CEO, the Named Executive Officers, and each, a Named Executive Officer) from time to time as it deems appropriate. The O&C Committee conducted such compensation reviews in the third quarter of each of 2014 and 2015. In determining the total direct compensation of our executive officers, the O&C Committee considers the performance of the executives and a competitive market and peer group analysis of executive compensation provided by compensation consultants engaged by the O&C Committee.  The O&C Committee obtains the input of the CEO on the performance of executive officers reporting to the CEO.  The CEO assesses the performance of each executive reporting to him in light of the executive’s business unit and function and presents a performance evaluation and compensation recommendation for each of these individuals to the O&C Committee. The CEO also reviews and considers the competitive market analysis in making his recommendation.  The O&C Committee also evaluates the CEO’s performance.  The O&C Committee determines total compensation, including base salary, annual incentive awards and long-term incentive awards, for each of our executive officers as it deems appropriate.

 

In the first quarter of each fiscal year, the O&C Committee (i) approves corporate goals and objectives under our annual and long-term incentive programs for our executive officers for awards for the current fiscal year, and (ii) certifies the performance results for incentive payments for performance periods that ended on December 31 of the previous fiscal year.  Following the completion of each fiscal year, in connection with the annual determination of the incentive awards to be paid to our executive officers reporting to the CEO, the CEO conducts an annual performance review of each such executive officer and evaluates each executive’s performance relative to the corporate goals and objectives for the completed fiscal year set by the O&C Committee.  The CEO then makes recommendations to the O&C Committee with respect to other executive officers’ annual incentive compensation.  The O&C Committee also annually evaluates the CEO’s performance in light of the goals and objectives for the previous fiscal year.  After considering this evaluation, as well as the CEO’s recommendations, the O&C Committee determines the annual incentive award payouts for the executive officers, including the Named Executive Officers, as well as goals and objectives under the annual and long-term incentive programs for the current fiscal year.

 

Compensation Philosophy

 

Our compensation philosophy, principles and practices are intended to compensate executives appropriately for their contribution to the attainment of key strategic objectives, and to strongly align the interests of executives and equity holders through both short and long-term performance goals.  We believe that:

 

 

Objectives of Compensation Philosophy

 

Our compensation philosophy is designed to meet the following objectives:

 

 

Elements of Compensation

 

In an effort to achieve our compensation objectives, we have established a compensation program for our executives that principally consists of:

 

 

For more information about each of the incentive and other benefit plans available to our executive officers see the compensation tables and the accompanying narratives immediately following “– Compensation Discussion and Analysis.”

 

Compensation Consultants

 

In October 2014 and 2015, the O&C Committee engaged PricewaterhouseCoopers LLP, a compensation consultant, to advise and report to the O&C Committee on executive compensation issues, including competitive market analyses of our executive compensation and independent directors’ compensation.  PricewaterhouseCoopers and its affiliates also provide consulting and related services to Oncor with respect to human resources, tax, internal audit, industry intelligence, strategy formulation and other matters. Oncor purchases compensation surveys (both executive and non-executive) from Willis Towers Watson and Willis Towers Watson also provides consulting and other services to Oncor’s human resources department.

 

Market Data

 

While we try to ensure that the greater part of an executive officer’s compensation is directly linked to the executive’s individual performance and Oncor’s financial and operational performance, we also seek to set our executive compensation program in a manner that is competitive with that of our peer group and industry compensation survey data in order to promote retention of key personnel and to attract high-performing executives from outside our company.

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2014 Survey

 

In the second and third quarters of 2014, the O&C Committee assessed executive severance, change in control policies and retention incentives for our executives against a Willis Towers Watson analysis of our practices as compared to the general electric utility industry, which also included a narrower executive compensation peer group used by Willis Towers Watson in previous executive compensation analyses provided to the O&C Committee. This peer group consisted of the following transmission/distribution industry companies and fully integrated utilities:

 

 

We include both transmission/distribution utility companies as well as fully integrated utility companies in our peer group because we compete with both for qualified executive personnel. 

 

In the fourth quarter of 2014, the O&C Committee assessed total compensation of our executives against a number of companies in the transmission/distribution industry and fully integrated utilities using both survey data and peer group comparisons.  For purposes of the 2014 assessment, PricewaterhouseCoopers completed a competitive market analysis of executive compensation for the O&C Committee in October 2014. This analysis involved a review of U.S. energy utility industry compensation survey data using our projected 2014 annual revenues.   The survey data was compared to our executive compensation elements targeted at both the 50th and 75th percentiles with respect to base salary, target cash annual incentives, and long-term incentives, and the resulting target total cash compensation (base salary and target cash annual incentives) and total direct compensation (base salary, target cash annual incentives and long-term incentives). The survey data was aged from the reporting date to January 1, 2015, using an annual rate of 3%, which was the projected average 2014 merit increase for executives based on the World at Work 2014 Salary Budget Survey.

 

In addition to the market data for utilities in the national marketplace, PricewaterhouseCoopers also provided publicly available data for a subset of these utilities, a peer group of transmission/distribution utility companies as well as fully integrated utility companies. That peer group included the 12 companies included in the Willis Towers Watson study discussed above, as well as two additional companies, Alliant Energy and Pinnacle West Capital Corp., which were added to the peer group as they are electric utility industry companies of similar size to Oncor.  Oncor’s size, based on revenues, is at the 50th percentile of this peer group. PricewaterhouseCoopers provided information on total target direct compensation, base salary, annual incentive targets and long-term incentives with respect to the five highest paid executives at each of those companies, along with comparisons of each such executive to the comparable Oncor executive using regression analysis based on Oncor’s revenue size.

 

The O&C Committee considered both peer group data and the competitive market survey data, along with individual performance and responsibilities, when determining total direct executive compensation, as well as each element of total direct compensation (base salary, annual incentives and long-term incentives).  The O&C Committee targeted total direct compensation, including target payouts under annual and long-term incentive awards, at approximately the 50th percentile of the competitive market survey group.  The 2014 competitive market analysis indicated that aggregate target total direct compensation of our executives was generally below the 50th percentile of the competitive market survey group. As a result of its review of the PricewaterhouseCoopers studies and each executive’s individual performance and responsibilities, the O&C Committee increased the base salaries of all Named Executive Officers, including our CEO, effective November 26, 2014.

 

2015 Survey

 

In the fourth quarter of 2015, the O&C Committee assessed total compensation of our executives against a number of companies in the transmission/distribution industry and fully integrated utilities using both survey data and peer group comparisons.  For purposes of the 2015 assessment, PricewaterhouseCoopers completed a competitive market analysis of executive compensation for the O&C Committee in October 2015. This analysis involved a review of U.S. energy utility industry compensation survey data using our projected 2015 annual revenues.  The survey data was compared to our

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executive compensation elements targeted at both the 50th and 75th percentiles with respect to base salary, target cash annual incentives, and long-term incentives, and the resulting target total cash compensation (base salary and target cash annual incentives) and total direct compensation (base salary, target cash annual incentives and long-term incentives). The survey data was aged from the reporting date to January 1, 2016, using an annual rate of 3.0%, which is the projected increase factor for 2015 for officers and executives based on the World at Work 2015 Salary Budget Survey.

 

In addition to the market data for utilities in the national marketplace, PricewaterhouseCoopers also provided publicly available data for a subset of these utilities, a peer group of transmission/distribution utility companies as well as fully integrated utility companies. Oncor’s size, based on revenues, is slightly above the 50th percentile of this peer group. PricewaterhouseCoopers provided information on total target direct compensation, base salary, annual incentive targets and long-term incentives with respect to the five highest paid executives at each of those companies, along with comparisons of each such executive to the comparable Oncor executive using regression analysis based on Oncor’s revenue size.  The primary peer group consisted of the same 14 companies used in PricewaterhouseCoopers’ fourth quarter 2014 study:

 

 

The O&C Committee considered both peer group data and the competitive market survey data, along with individual performance and responsibilities, when determining total direct executive compensation, as well as each element of total direct compensation (base salary, annual incentives and long-term incentives).  The O&C Committee targeted total direct compensation, including target payouts under annual and long-term incentive awards, at approximately the 50th percentile of the competitive market survey group.  The 2015 competitive market analysis indicated that aggregate target total direct compensation of our executives was generally below the 50th percentile of the competitive market survey group. As a result of its review of the PricewaterhouseCoopers studies and each executive’s individual performance and responsibilities, the O&C Committee increased the base salaries of all Named Executive Officers, including our CEO, effective November 26, 2015.

 

Compensation Elements

 

A significant portion of each executive officer’s compensation is variable, at-risk and directly linked to achieving company performance objectives set by the O&C Committee and the alignment with equity owner interests in order to achieve long-term success of our company.  Other factors impacting compensation include individual performance, retention risk, and market compensation data.  None of these other factors are assigned individual weights, but are considered together.  The company has no policies or formula for allocating compensation among the various elements.  The following is a description of the principal compensation components provided to our executives.

 

Base Salary

 

We believe that base salary should be commensurate with the scope and complexity of each executive’s position, the level of responsibility required, and demonstrated performance.  We also believe that a competitive level of base salary is required to attract and retain qualified talent.

 

As part of its review of total direct compensation for our executive officers, the O&C Committee reviews and determines executive officers’ base salaries periodically as it deems appropriate.  The periodic review includes the O&C Committee’s review of the most recent analysis of our executive compensation against competitive market data and comparison to our peer group.  Our CEO also reviews this analysis, along with the performance and level of responsibility of each executive officer reporting to him, and makes recommendations to the O&C Committee regarding any salary changes for such executive officers.  The O&C Committee may also approve salary increases as a result of an executive’s performance, promotion or a significant change in an executive’s responsibilities. 

 

In October 2015, the O&C Committee engaged PricewaterhouseCoopers to, among other things, prepare a competitive market analysis of our executive compensation.  As discussed above, the 2015 competitive market analysis indicated that aggregate target total direct compensation of our executives was generally below the 50th percentile of the competitive market survey group.  As a result of this study and after considering individual performance and

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responsibilities, the O&C Committee increased the base salary of each of our Named Executive Officers, effective November 26, 2015, to bring those salaries closer to the 50th percentile of the competitive market for their respective offices.

 

Annual Base Salary for Named Executive Officers

 

The annual base salaries of Named Executive Officers at December 31, 2015 were as follows:

 

 

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Executive Annual Incentive Plan

 

The O&C Committee and our CEO are responsible for administering the Executive Annual Incentive Plan.  The award targets under the plan are established on a company-wide basis and the O&C Committee seeks to set these targets at performance challenging levels.  The O&C Committee determines annual target award percentages for executives based on an evaluation of the most recent competitive market analysis conducted by PricewaterhouseCoopers, its compensation consultant, and, with respect to executives other than our CEO, recommendations from our CEO.  In making his recommendations to the O&C Committee regarding target award percentages, our CEO assesses the performance goals of each executive reporting to him against the goals of the executive’s business unit and function and reviews the competitive market analysis.  Executive Annual Incentive Plan awards are based on a target payout, which are set as a percentage of a participant’s base salary and are based on the performance of Oncor and individual participant performance.  The annual incentive target payout for each executive is set near the median of executives with similar responsibilities among our competitive market survey group and peer group. 

 

The awards payable in any given plan year are determined based on (1) the target award levels of participants in the Executive Annual Incentive Plan, (2) achievement of a threshold, target or superior funding trigger, and (3) achievement of threshold, target or superior levels of any additional operational or other metrics that the O&C Committee elects to apply in determining the aggregate amount of awards, which we sometimes refer to as the operational funding percentage.  The funding trigger described in (2) above is based on “EBITDA,” which means Oncor’s earnings before interest, taxes, depreciation and amortization, as determined by the O&C Committee. The O&C Committee has excluded from EBITDA securitization revenue and amortization of purchase accounting adjustments.  EBITDA is used as the funding trigger because we believe it is an effective measure to assess profitability of the business.  Based on the level of attainment of the funding trigger and the operational funding percentage, the O&C Committee determines an aggregate performance final funding percentage.  This final funding percentage is then multiplied by each target award, and the resulting amount is then multiplied by any performance modifiers to determine a final award amount. The O&C Committee sets operational metrics, performance goals, target awards and individual performance modifiers in its discretion, and also has broad discretion to adjust funding percentages and individual awards.

 

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Funding of incentive awards is based first on the achievement of stated EBITDA threshold, target or superior funding trigger levels set by the O&C Committee for that year. Incentives are only payable under the Executive Annual Incentive Plan in the event the threshold EBITDA is achieved. The level of EBITDA achieved is used to calculate a funding trigger percentage, as illustrated in the table below.

 

 

Assuming the EBIDTA threshold is met, an operational funding percentage is calculated based on achievement of the operational or other metrics set by the O&C Committee. For 2015, the O&C Committee established metrics based solely on operational targets because it believes that incentives should be based on achievement of operational goals.  The purpose of these operational targets, which are based on safety, reliability, operational efficiency and infrastructure readiness metrics, is to promote enhancement of our services to customers.  The table below sets forth these operational metrics in further detail.

 

 

An operational funding percentage is calculated based on the level of achievement of each operational metric. The O&C Committee determines the weighting of each of those metrics within the operational funding percentage and the threshold, target and superior levels of each metric. As with the EBITDA funding trigger each operational metric must

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meet a threshold level in order to provide any funding for that metric. Meeting the threshold amount results in 50% of the available funding for that metric, with target and superior levels resulting in 100% and 150%, respectively, of the available funding for that metric. Once threshold has been achieved, actual results in between each level result in a funding percentage equal to the percentage of the target achieved (up to 150% for achievement of the superior performance level).

 

Once an operational funding percentage is calculated, the final funding percentage is determined in accordance with the table below.

 

 

 

For 2015, our EBITDA for purposes of the Executive Annual Incentive Plan met the threshold EBITDA, met the target EBITDA, and did not meet the superior EBITDA, resulting in an EBITDA funding percentage of 100.5%.  Our operational funding percentage was 122.4%.  As a result, the final funding percentage was calculated using the funding trigger percentage multiplied by the operational funding percentage, up to a payout percentage not exceeding the funding trigger percentage, resulting in a final funding percentage of 100.5%.

 

To calculate an executive officer’s award amount, the final funding percentage is first multiplied by the executive officer’s target award, which is computed as a percentage of actual base salary. Based on the executive officer’s performance, an individual performance modifier is then multiplied by the calculated award to determine the final incentive payment.  An individual performance modifier is based on reviews and evaluations of the executive officer’s performance by the CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO).  Factors used in determining individual performance modifiers may include operational measures (including the safety, reliability, operational efficiency and infrastructure readiness metrics discussed above), company objectives, individual management and other goals, specific job objectives and competencies, the demonstration of team building and support attributes and general demeanor and behavior.  The CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) do not assign these factors individual weights, but considered them together.  Each executive officer’s individual performance modifier is set by the O&C Committee within a range determined in its discretion. For 2015 plan year awards, the O&C Committee set this range at plus fifty percent (+50%) to minus fifty percent (-50%). In October 2015, in recognition of individual and company performance, and the additional time commitments and responsibilities required of them in 2015, particularly with respect to strategy development and matters relating to the EFH Acquisition and related application for regulatory approval (see Note 2 to Financial Statements), the O&C Committee approved individual modifiers to the Named Executive Officers’ 2015 awards in the amounts of 140% for Messrs. Shapard, Davis and Nye and 120% for Messrs. Clevenger and Greer. 

 

The following table provides a summary of the 2015 targets and actual awards for each Named Executive Officer.  All awards under the Executive Annual Incentive Plan are made in the form of lump sum cash payments to participants by March 15 of the year following the plan year to which the award relates.  

 

2015 Annual Incentives (Payable in 2016) for Named Executive Officers

 

 

 

For more detailed information on terms of the Executive Annual Incentive Plan, including the calculation of the 2015 EBITDA funding percentage and the operational funding percentage, the 2015 operational funding triggers and the actual performance levels achieved, see the narrative that follows the Grants of Plan- Based Awards – 2015 table.

 

Retention Agreements

 

In February 2013, the O&C Committee approved our entrance into a retention agreement with Mr. Nye.  As our Senior Vice President, General Counsel and Secretary, Mr. Nye is responsible for overseeing all of Oncor’s legal, regulatory and legislative efforts. In approving the agreement, the O&C Committee considered Mr. Nye’s demonstrated leadership qualities, his ongoing contributions to the Company’s success, the potential retention risk and the extent of disruption likely to be caused by unplanned attrition. The agreement provided for the payment of a one-time cash retention bonus of $300,000 to Mr. Nye contingent upon his continued employment and satisfactory performance of his job duties as directed by Oncor through December 31, 2014. In January 2015, Mr. Nye received this retention payment.  In February 2015, the O&C Committee approved our entrance into a new retention agreement with Mr. Nye. The agreement is identical to his previous retention agreement, except that it provides for the payment of a one-time cash retention bonus of $300,000 to Mr. Nye contingent upon his continued employment and satisfactory performance of his job duties as directed by Oncor through December 31, 2016.  The O&C Committee approved our entrance into each of the retention agreements to reinforce and encourage Mr. Nye’s continued dedication to us as a member of the executive management team and to assure that we will retain his services to achieve our retention objectives. 

 

Long-Term Incentives

 

Our long-term incentive program currently consists of the Equity Interests Plan and the Long-Term Incentive Plan. The Long-Term Incentive Plan was adopted effective as of January 1, 2013, as a replacement long-term incentive program to the SARs Plan.  The purpose of our long-term incentive program is to promote the long-term financial interests and growth of Oncor by attracting and retaining management and other personnel and key service providers.  Our long-term incentive program was developed to enable us to be competitive in our compensation practices and because we believe that equity ownership in Oncor under the Equity Interests Plan and the opportunity to benefit from positive long-term performance of the company under our plans motivate our management to work towards the long-term success of our business and align management’s interests with those of our equity holders.  In addition, we believe that certain employment-related conditions and the multi-year time periods of these programs, as discussed in more detail below, provide significant retentive value to us.

 

Equity Interests Plan and Management Investment Opportunity

 

The Equity Interests Plan allows our board of directors to offer non-employee directors, management and other personnel and key service providers of Oncor the right to invest in Class B membership units of Investment LLC (each, a Class B Interest), an entity whose only assets consist of equity interests in Oncor.  As a result, each holder of Class B Interests holds an indirect ownership interest in Oncor.  Any dividends received by Investment LLC from Oncor in respect of its membership interests in Oncor are subsequently distributed by Investment LLC to the holders of Class B Interests in proportion to the number of Class B Interests held by such holders.

 

In November 2008 and August 2011, pursuant to the terms of the Equity Interests Plan, our board of directors offered certain officers and key employees the opportunity to invest in Investment LLC and purchase Class B Interests in Investment LLC for the fair market value of Class B Interests on such date, as determined by our board of directors (collectively, the Management Investment Opportunity).  In addition to the opportunity to purchase Class B Interests in Investment LLC, such officers and key employees also received an amount of SARs based on the aggregate amount invested.  SARs received in connection with the Management Investment Opportunity were subject to the terms of the SARs Plan, and were all exercised in 2012 as discussed under “— Stock Appreciation Rights Settlement” below.  Participants in the Management Investment Opportunity were also given the option to fund any or all of their investment in Investment LLC using funds in their Salary Deferral Program accounts.  Any Class B Interests purchased by an executive officer using funds in his or her Salary Deferral Program account are held of record by the Salary Deferral Program for the benefit of such officer.

 

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In connection with the Management Investment Opportunity, each participant entered into a management stockholder’s agreement and a sale participation agreement.  The management stockholder’s agreement, among others things, gives Oncor the right to repurchase a participant’s Class B Interests in the event of specified terminations of a participant’s employment or violation by a participant of certain of his or her non-compete obligations.  We believe this repurchase right provides significant retentive value to our business.  For a more detailed description of the terms of the management stockholder’s agreement and sale participation agreement, see “Certain Relationships and Related Transactions, and Director Independence – Related Party Transactions – Agreements with Management and Directors.”

 

Pursuant to its limited liability company agreement, Investment LLC must at all times ensure that for each outstanding Class B Interest it issues, Investment LLC holds a corresponding number of units of Oncor’s equity interests. As a result, any future issuances under the Equity Interests Plan will require Investment LLC to purchase from Oncor Holdings additional equity interests of Oncor. Investment LLC has entered into a revolving stock purchase agreement with Oncor Holdings pursuant to which Investment LLC may purchase units of Oncor’s equity interests held by Oncor Holdings in the event Investment LLC proposes to issue additional Class B Interests pursuant to the Equity Interests Plan.  However, the aggregate number of equity interests sold by Oncor Holdings pursuant to the revolving stock purchase agreement cannot result in Oncor Holdings owning less than 80% of Oncor’s outstanding equity interests, or 508,000,000 units. At February 15, 2016, Investment LLC may purchase from Oncor Holdings up to an additional 191,492 units of Oncor and issue up to a corresponding number of Class B Interests.

 

For a more detailed description of the Equity Interests Plan and the Management Investment Opportunity, refer to the narrative that follows the Grants of Plan-Based Awards – 2015 table.

 

Long-Term Incentive Plan

In 2013, our board of directors adopted the Long-Term Incentive Plan as a replacement long-term incentive program to the SARs Plan.  The Long-Term Incentive Plan encourages retention of executive officers and key employees by stipulating performance periods of generally 36 months. We also believe that these multi-year performance periods encourage participants to strive for the long-term, sustained success of the company. The nature of the performance targets also ensures that participants strive towards both financial and operational goals.

 

Our board of directors delegated administration of the Long-Term Incentive Plan to the O&C Committee. Our executive officers and any other key employees of the company or its subsidiaries designated by the O&C Committee are eligible to participate. The plan provides for cash awards to be paid after completion of a performance period based on achievement of certain stated performance goals. A performance period under the Long-Term Incentive Plan is the 36 month period beginning each January 1, unless otherwise determined by the O&C Committee in its sole discretion.  The participants for each performance period shall be determined by the O&C Committee not later than the 90th day after commencement of the performance period. Performance goals consist of one or more specific performance objectives established by the O&C Committee in its discretion within the first 90 days of the commencement of the applicable performance period. Performance goals may be designated with respect to the company as a whole or one or more operating units, and may also be determined on an absolute basis or relative to internal goals, or relative to levels attained in prior years, or relative to other companies or indices, or as ratios expressing relationships between two or more performance goals. For 2015 grants, the O&C Committee set the performance targets on a company-wide basis and at levels it believes are performance challenging.  The long-term incentive target payout for each executive is set near the median of executives with similar responsibilities among our competitive market survey group.

 

The O&C Committee determined that the performance goals used for the Long-Term Incentive Plan awards granted in 2015 would consist of a financial trigger and operational metrics.  The funding of the 2015 Long-Term Incentive Plan award is contingent first upon Oncor achieving a cumulative threshold net income level for the three year period. If Oncor fails to achieve the stated net income level for the performance period, no award is payable. For awards granted in 2015 or later, the funding trigger percentage for a performance period equals 50% if the threshold level is met, 100% if target level is met, or 150% if the superior level is met or exceeded. For awards granted in 2013 and 2014, there is no superior funding trigger level. The applicable percentage for performance between threshold and target performance levels, and the target and superior performance levels are determined on a straight line interpolation basis.  Once a funding trigger percentage is determined, an operational goal percentage is determined based on Oncor’s satisfaction of four operational metrics. The operational goals used for the Long-Term Incentive Plan awards mirror the operational metrics used for awards under the Executive Annual Incentive Plan.  These goals relate to (1) a safety metric based on the number of employee injuries using a Days Away, Restricted or Transfer (DART) system with a modifier for fatalities as a result of a safety violation, (2) a

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reliability metric as measured by the System Average Interruption Duration Index (SAIDI), (3) an operational efficiency metric based on the achievement of targeted operation and maintenance expense (O&M) and sales, general and administrative expense (SG&A) levels determined on a per customer cost basis, and (4) an infrastructure readiness metric based on the capital expenditure per three year average kW peak. The purpose of these operational targets, which are based on safety, reliability, operational efficiency and infrastructure readiness metrics, is to promote enhancement of our services to customers.  For additional discussion on the purposes of the operational metrics, see the table and discussion of the Operational Metrics in “Compensation Elements—Executive Annual Incentive Plan.” 

 

The O&C Committee set the threshold, target and superior levels for each operational metric. The achievement of those levels results in funding for a specific metric of 50%, 100% and 150%, respectively. Once the threshold has been achieved, actual results in between each level result in a funding percentage equal to the percentage of the target achieved. Based on the weighting for each operational metric, an aggregate weighted average of operational goal percentage is determined.

 

For awards granted in 2013 and 2014 (payable in 2016 and 2017, respectively), the amount of each Long-Term Incentive Plan award is determined based on the product of (i) the funding trigger percentage, multiplied by (ii) the weighted average of stated operational goal percentages, multiplied by (iii) the target opportunity dollar amount stated in each individual award.

 

In March 2015, the O&C Committee revised the long-term incentive plan form award agreement. The revised award agreement, which was used for grants made in 2015, provides that the final funding percentage for long-term incentive awards is calculated using the funding trigger percentage and weighted operational goal percentage, as set forth in the table below.

 

The amount of each Long-Term Incentive Plan award granted in 2015 or later is then determined based on the product of the final funding percentage, multiplied by the target opportunity dollar amount stated in each individual award letter.

 

The plan also gives the O&C Committee the discretion to adjust long-term awards to prevent unintended dilution or enlargement as a result of certain extraordinary events. For each performance goal, the O&C Committee may set threshold, target and superior levels of attainment and the manner of calculating the award amounts at each level (such as a specified dollar amount or a percentage or multiple of base salary). However, the Long-Term Incentive Plan provides that the maximum award payable for a performance period shall not exceed 150% of the target award.

 

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The following table provides a summary of the targets awards granted to each Named Executive Officer in 2015.  All awards under the Long Term Incentive Plan are to be made in the form of lump sum cash payments to participants on or before April of the year following the last year of the performance period. For target awards granted in 2015, awards are payable on or before April 1, 2018.

 

2015 Target Long-Term Incentive Award Grants (Payable in 2018) for Named Executive Officers

 

 

 

In February 2016, the O&C Committee certified the level of attainment of performance goals established for long-term incentive awards granted in 2013 with a performance period that ended on December 31, 2015. Pursuant to the terms of the 2013 awards, the amount of each award was determined based on the product of (i) the funding trigger percentage, multiplied by (ii) the weighted average of stated operational goal percentages, multiplied by (iii) the target opportunity dollar amount stated in each individual award. The O&C Committee certified a funding trigger percentage of 100% and an operational goal percentage of 114.8%, resulting in long-term incentive awards as set forth below for the Named Executive Officers.

 

2013-2015 Performance Period Long-Term Incentive Awards (Payable in 2016) for Named Executive Officers

 

 

 

 

In accordance with the terms of the plan, these amounts will be paid to such officers prior to April 1, 2016.

 

For a more detailed description of the Long-Term Incentive Plan, the net income funding trigger, the performance metrics and the actual performance levels achieved for the 2013-2015 performance period, refer to the narrative that follows the Grants of Plan-Based Awards – 2015 table.

 

Stock Appreciation Rights Settlement

 

The O&C Committee adopted and implemented the SARs Plan in 2008.  Between 2008 and 2011, the O&C Committee awarded SARs pursuant to the SARs Plan to certain employees of Oncor, including the Named Executive Officers. In 2012, all participants in the SARs Plan participated in an early exercise of all outstanding SARs issued under the SARs Plan (SARs Exercise Opportunity).  As a result, all outstanding SARs under the SARs Plan were exercised and have been settled with participants, other than the accrual of interest on all dividends declared as of October 31, 2012 with respect to the SARs at the ten-year Treasury constant maturity rate increased by 100 basis points, as determined by Oncor and adjusted semi-annually, and no further dividend accruals.  As a result of the SARs Exercise Opportunity, we began to accrue interest for the Named Executive Officers on the following amounts of dividends:  Mr. Shapard, $5,104,820; Mr. Davis, $816,771; Mr. Clevenger, $816,771, Mr. Greer, $1,061,802; and Mr. Nye, $250,649. The dividends and interest are

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payable when dividends would become payable under the SARs Plan, which is generally upon a participant’s death, disability, separation from service, unforeseeable emergency, or a change in control, each as defined by section 409A of the Internal Revenue Code.

 

The SARs Plan remains in effect solely with respect to the payout of interest on existing dividend amounts. The O&C Committee does not plan to issue any additional SARs under the SARs Plan. The Long-Term Incentive Plan was developed to replace the SARs Plan as the primary long-term incentive component of executive compensation.

 

Deferred Compensation and Retirement Plans

 

Our executive compensation package includes the ability to participate in the Salary Deferral Program, the thrift plan, the Oncor Retirement Plan and the Supplemental Retirement Plan and for executives hired before January 1, 2002, subsidized retiree health care coverage.  We believe that these programs, which are common among companies in the utility industry, are important to attract and retain qualified executives.

 

Salary Deferral Program

 

Oncor executive officers are eligible to participate in a Salary Deferral Program that allows employees to defer a portion of their salary and annual incentive award and to receive a matching award based on their salary deferrals.  Executives can currently defer up to 50% of their base salary and up to 85% of any annual incentive award.  At the executive officer’s option the deferral period can be set for seven years, until retirement or a combination of both.  Oncor generally matches 100% of deferrals up to 8% of salary deferred under the program.  Oncor does not match deferred annual incentive awards.  Matching contributions vest at the earliest of seven years after the deferral date, executive’s retirement or a change in control of Oncor (as defined in the Salary Deferral Program). The program encourages employee retention as, generally, participants who terminate their employment with us prior to the seven year vesting period forfeit our matching contribution to the program.

 

In February 2015, our board of directors approved an amendment to the Salary Deferral Program that allows Oncor, at the direction of the O&C Committee, to make additional discretionary contributions into a Salary Deferral Program participant’s account. The amendment provides that the amount and vesting parameters of any such discretionary contribution shall be determined by the O&C Committee. In February 2015, in connection with the Salary Deferral Program amendment, the O&C Committee approved a discretionary contribution into the Salary Deferral Program account of Mr. Shapard, our CEO, in order to correct a company administrative error that resulted in Mr. Shapard not being enrolled in the thrift plan for approximately two years, from 2007-2009. To compensate for this administrative error, the O&C Committee approved our payment of a discretionary contribution to Mr. Shapard’s Salary Deferral Program account in the amount of $93,060. The contribution is fully vested in his account as of the date made, and the contribution is eligible for distribution to Mr. Shapard upon his retirement, as defined under the Salary Deferral Program.

 

Participants in the Management Investment Opportunity were also given the option to fund any or all of their investment in Investment LLC using funds in their Salary Deferral Program accounts.  The Salary Deferral Program is the record holder of Class B Interests purchased by executives using funds in their Salary Deferral Program accounts.

 

Refer to the narrative that follows the Nonqualified Deferred Compensation table below for a more detailed description of the Salary Deferral Program.

 

Thrift Plan

 

All eligible employees of Oncor may contribute a portion of their regular salary or wages to the thrift plan and Oncor matches a portion of an employee’s contributions.  This matching contribution is 75% of the employee’s contribution up to the first 6% of the employee’s salary for employees covered under the traditional defined benefit component of the Oncor Retirement Plan, and 100% of the employee’s contribution up to 6% of the employee’s salary for employees covered under the cash balance component of the Oncor Retirement Plan.  All matching contributions are invested in thrift plan investments as directed by the participant and are immediately vested.  During 2014, Oncor employees participated in a thrift plan sponsored by EFH Corp., but Oncor, as a participating employer in such plan, was directly responsible for the costs of any matching awards, premiums and other payments relating to Oncor employees pursuant to these programs.  Effective January 1, 2015, all Oncor employees were transferred from the EFH Corp.-sponsored thrift plan to an Oncor-sponsored thrift plan (Oncor Thrift Plan).  Oncor’s matching contributions are the same under the Oncor Thrift Plan as they

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were under the EFH Corp.-sponsored thrift plan at the time of the transfer.  As a result of the creation of the Oncor Thrift Plan, Oncor employees no longer participate in the EFH Corp.-sponsored thrift plan.

 

Retirement Plan

 

All Oncor employees are eligible to participate in the Oncor Retirement Plan, which is qualified under applicable provisions of the Code. The Oncor Retirement Plan contains both a traditional defined benefit component and a cash balance component.  Effective January 1, 2002, the defined benefit plan changed from a traditional final average pay design to a cash balance design.  This change was made to better align the retirement program with competitive practices.  All participants were extended an opportunity to remain in the traditional program component or transition to the cash balance component.  Messrs. Davis and Greer elected to remain in the traditional program. All employees employed after January 1, 2002 are eligible to participate only in the cash balance component.  As a result, Messrs. Shapard, Clevenger and Nye are covered only under the cash balance component.  For a more detailed description of the Oncor Retirement Plan, refer to the narrative that follows the Pension Benefits table and Footnote 10 to Financial Statements.

 

Supplemental Retirement Plan

 

Oncor executives participate in the Supplemental Retirement Plan.  The Supplemental Retirement Plan provides for the payment of retirement benefits that:

 

 

For a more detailed description of the Supplemental Retirement Plan, please refer to the narrative that follows the Pension Benefits table below.

 

Retiree Health Care

 

Employees hired by Oncor (or EFH Corp’s predecessor) prior to January 1, 2002 are generally entitled to receive an employer-paid subsidy for retiree health care coverage upon their retirement from Oncor.   As such, Messrs. Davis and Greer will be entitled to receive a subsidy from Oncor for retiree health care coverage upon their retirement from Oncor.  Messrs. Shapard, Clevenger and Nye were hired after January 1, 2002 and are not eligible for the employer subsidy.

 

Perquisites and Other Benefits

 

Perquisites provided to our executive officers are intended to serve as part of a competitive total compensation program and to enhance our executives’ ability to conduct company business.  These benefits include financial planning, a preventive physical health exam, and reimbursements for certain business-related country club and/or luncheon club membership costs.  For a more detailed description of the perquisites, refer to Footnote 4 in the Summary Compensation Table below.

 

The following is a summary of benefits offered to our executive officers that are not available to all employees:

 

Executive Financial Planning:  All executive officers are eligible to receive executive financial planning services.  These services are intended to support them in managing their financial affairs, which we consider especially important given the high level of time commitment and performance expectation required of our executives.  Furthermore, these services help ensure greater accuracy and compliance with individual tax regulations.

 

Executive Physical Health Exam:  All executive officers are also eligible to receive an annual physical examination.  We recognize the importance of the health of our senior management team and the vital leadership role they play in directing and operating the company.  The executive officers are important assets of the company and this benefit is designed to help ensure their health and long-term ability to serve our equity holders.

 

Country Club/Luncheon Club Membership:  Certain executive officers are entitled to reimbursement of country club or luncheon club memberships if the company determines that a business need exists for such executive’s memberships, as

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such clubs provide those officers with a setting for cultivating business relationships and interaction with key community leaders and officials.

 

Split-Dollar Life Insurance:  Split-dollar life insurance policies were purchased for eligible executives of Oncor.  The eligibility provisions of this program were modified in 2003 so that no new participants were added after December 31, 2003.  Accordingly, none of our Named Executive Officers are eligible to participate in the Split-Dollar Life Insurance Program, although certain of our other executives are participants.  The death benefits of participants’ insurance policies are equal to two, three or four times their annual Oncor Split-Dollar Life Insurance Program compensation, depending on their executive category.  Individuals who first became eligible to participate in the Split-Dollar Life Insurance Program after October 15, 1996, vested in the insurance policies issued under the Split-Dollar Life Insurance Program over a six-year period.  Oncor pays the premiums for the policies and has received a collateral assignment of the policies equal in value to the sum of all of its insurance premium payments.  Although the Split-Dollar Life Insurance Program is terminable at any time, it is designed so that if it is continued, Oncor will fully recover all of the insurance premium payments covered by the collateral assignments either upon the death of the participant or, if the assumptions made as to policy yield are realized, upon the later of 15 years of participation or the participant’s attainment of age 65.  In 2007, the Split-Dollar Life Insurance Program was amended to freeze the death benefits at the then current level.

 

Spouse Travel Expenses:  From time to time we pay for an executive officer's spouse to travel with the executive officer when taking a business trip, if their presence contributes to the business purpose.

 

In addition to the benefits described above, Oncor offers its executive officers the ability to participate in benefit plans for medical, dental and vision insurance, group term life insurance and accidental death and disability, which are generally made available to all employees at the company.

 

Individual Named Executive Officers Compensation

 

Oncor has not entered into employment agreements with any of the Named Executive Officers.   As described above under “-Compensation – Retention Agreements,” Oncor has entered into a retention agreement with Mr. Nye providing for the payment of a one-time cash retention bonus if certain conditions are satisfied.

 

CEO Compensation

 

Robert S. Shapard

 

The following is a summary of Mr. Shapard’s individual compensation for 2015.

 

Base Salary:  Mr. Shapard’s base salary as CEO was increased from $803,000 to $859,000 effective November 26, 2015.

 

Annual Incentive:  In 2016, the O&C Committee awarded Mr. Shapard $852.288 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2015 performance as well as the O&C Committee’s review of Mr. Shapard’s overall leadership of the company in 2015. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan- Based Awards – 2015 table and related narrative.

 

Long-Term Incentives:  In 2015, Mr. Shapard was granted a Long-Term Incentive Plan target award of $2,209,856 for the performance period of January 1, 2015 through December 31, 2017. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2018. In February 2016, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2013 for the January 1, 2013 – December 31, 2015 performance period. Mr. Shapard’s Long-Term Incentive Plan award for the 2013-2015 performance period is $2,211,507 and will be paid on or before April 1, 2016. See “—Compensation Elements —Long-Term Incentives — Long-Term Incentive Plan” above and the Grants of Plan Based Awards-2015 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.

 

Salary Deferral Program Discretionary Contribution: In February 2015, the O&C Committee approved a discretionary contribution into the Salary Deferral Program account of Mr. Shapard, our CEO, in order to correct a company administrative error that resulted in Mr. Shapard not being enrolled in the thrift plan for approximately two years,

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from 2007-2009. To compensate for this administrative error, the O&C Committee approved our payment of a discretionary contribution to Mr. Shapard’s Salary Deferral Program account in the amount of $93,060. The contribution is fully vested in his account as of the date made, and the contribution is eligible for distribution to Mr. Shapard upon his retirement, as defined under the Salary Deferral Program. Refer to the narrative that follows the Nonqualified Deferred Compensation table below for a more detailed description of the Salary Deferral Program.

 

Compensation of Other Named Executive Officers

 

David M. Davis

 

The following is a summary of Mr. Davis’s individual compensation for 2015.

 

Base Salary:  Mr. Davis’ base salary as Senior Vice President and Chief Financial Officer was increased from $428,000 to $458,000 effective November 26, 2015.

 

Annual Incentive:  In 2016, the O&C Committee awarded Mr. Davis $333,142 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2015 performance, as well as Mr. Davis’s individual performance in 2015. Specifically, the O&C Committee and the CEO considered his management of the company’s financial systems, operations and initiatives, including the maintenance of planning, budgeting, accounting, and treasury functions and his management of the liquidity of Oncor’s maintenance and construction programs. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan- Based Awards – 2015 table and related narrative.

 

Long-Term Incentives:  In 2015, Mr. Davis was granted a Long-Term Incentive Plan target award of $630,016 for the performance period of January 1, 2015 through December 31, 2017. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2018. In February 2016, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2013 for the January 1, 2013 – December 31, 2015 performance period. Mr. Davis’s Long-Term Incentive Plan award for the 2013-2015 performance period is $633,696 and will be paid on or before April 1, 2016. See “—Long-Term Incentives — Long-Term Incentive Plan” above and the Grants of Plan Based Awards-2015 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.

 

Don J. Clevenger

 

The following is a summary of Mr. Clevenger’s individual compensation for 2015.

 

Base Salary:  Mr. Clevenger’s base salary as Senior Vice President, Strategic Planning, was increased from $412,000 to $441,000 effective November 26, 2015.

 

Annual Incentive:  In 2016, the O&C Committee awarded Mr. Clevenger $274,882 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2015 performance, as well as Mr. Clevenger’s individual performance in 2015. Specifically, the O&C Committee and the CEO evaluated his performance overseeing the development of strategies, policies and plans for optimizing the value and performance of our electric delivery systems and related assets. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan- Based Awards – 2015 table and related narrative.

 

Long-Term Incentives:   In 2015, Mr. Clevenger was granted a Long-Term Incentive Plan target award of $606,464 for the performance period of January 1, 2015 through December 31, 2017. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2018. In February 2016, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2013 for the January 1, 2013 – December 31, 2015 performance period. Mr. Clevenger’s Long-Term Incentive Plan award for the 2013-2015 performance period is $616,797 and will be paid on or before April 1, 2016. See “—Long-Term Incentives — Long-Term Incentive Plan” above and the Grants of Plan Based Awards-2015 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.

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James A. Greer

 

The following is a summary of Mr. Greer’s individual compensation for 2015.

 

Base Salary:  Mr. Greer’s base salary as Senior Vice President and Chief Operating Officer was increased from $428,000 to $458,000 effective November 26, 2015.

 

Annual Incentive:  In 2016, the O&C Committee awarded Mr. Greer $285,550 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2015 performance, as well as Mr. Greer’s individual performance in 2015 overseeing the complex operations of Oncor’s entire transmission and distribution system, one of the largest such systems in the country. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan- Based Awards – 2015 table and related narrative.

 

Long-Term Incentives:   In 2015, Mr. Greer was granted a Long-Term Incentive Plan target award of $630,016 for the performance period of January 1, 2015 through December 31, 2017. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2018. In February 2016, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2013 for the January 1, 2013 – December 31, 2015 performance period. Mr. Greer’s Long-Term Incentive Plan award for the 2013-2015 performance period is $633,696 and will be paid on or before April 1, 2016. See “—Long-Term Incentives — Long-Term Incentive Plan” above and the Grants of Plan Based Awards-2015 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.

 

E. Allen Nye, Jr.

 

The following is a summary of Mr. Nye’s individual compensation for 2015.

 

Base Salary:  Mr. Nye’s base salary as Senior Vice President and General Counsel was increased from $463,000 to $495,000 effective November 26, 2015.

 

Annual Incentive:  In 2016, the O&C Committee awarded Mr. Nye $360,355 pursuant to the Executive Annual Incentive Plan, reflecting the result of Oncor’s 2015 performance, as well as Mr. Nye’s individual performance in 2015 overseeing all legal, regulatory and governmental affairs matters affecting Oncor. For more detailed information on the calculation of Executive Annual Incentive Awards, see “—Compensation Elements — Executive Annual Incentive Plan” above and the Grants of Plan- Based Awards – 2015 table and related narrative.

 

Long-Term Incentives:   In 2015, Mr. Nye was granted a Long-Term Incentive Plan target award of $681,536 for the performance period of January 1, 2015 through December 31, 2017. Actual awards will be based on the Company’s achievement of approved performance goals and are payable on or before April 1, 2018. In February 2016, the O&C Committee certified the results of performance goals for Long-Term Incentive Plan awards granted in 2013 for the January 1, 2013 – December 31, 2015 performance period. Mr. Nye’s Long-Term Incentive Plan award for the 2013-2015 performance period is $718,189 and will be paid on or before April 1, 2016. See “—Long-Term Incentives — Long-Term Incentive Plan” above and the Grants of Plan Based Awards-2015 table and related narrative for additional information on the Long-Term Incentive Plan and target awards.

 

Retention Agreement: In January 2015, Mr. Nye received a retention payment of $300,000 pursuant to the terms of his retention agreement, dated as of February 12, 2013, with the Company.  In February 2015, the O&C Committee approved our entrance into a new retention agreement with Mr. Nye.  The agreement is identical to his previous retention agreement, except that it provides for the payment of a one-time cash retention bonus of $300,000 to Mr. Nye contingent upon his continued employment and satisfactory performance of his job duties as directed by Oncor through December 31, 2016.

 

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Contingent Payments

 

Change in Control Policy

 

Oncor makes available a change in control policy (the Change in Control Policy) for its eligible executives.  The purpose of the Change in Control Policy is to provide the payment of transition benefits to eligible executives if:

 

 

The terms “change in control,” “without cause” and “good reason” are defined in the Change in Control Policy. 

 

We believe these payments, to be triggered upon meeting the criteria above, provide incentive for executives to fully consider potential changes that are in the best interest of Oncor and our equity holders, even if such changes would result in the executives’ termination.  We also believe it is important to have a competitive change in control program to attract and retain the caliber of executives that our business requires and to foster an environment of relative security within which we believe our executives will be able to focus on achieving company goals.

 

On July 29, 2015, our board of directors amended and restated the Change in Control Policy effective as of August 1, 2015 to revise the definitions of good reason and change in control. Refer to the “Potential Payments upon Termination or Change in Control—Change in Control Policy” for detailed information about payments and benefits that our executive officers are eligible to receive under the Change in Control Policy.

 

Severance Plan

 

Oncor also makes available a Severance Plan (the Severance Plan) to provide certain benefits to eligible executives.  The purpose of the Severance Plan is to provide benefits to eligible executives who are not eligible for severance pursuant to another plan or agreement (including an employment agreement) and whose employment is involuntarily terminated for reasons other than:

 

 

We believe it is important to have a severance plan in place to attract and retain the caliber of executives that our business requires and to foster an environment of relative security within which we believe our executives will be able to focus on achieving company goals.  Refer to the “Potential Payments upon Termination” for detailed information about payments and benefits that our executive officers are eligible to receive under the Severance Plan.

 

Accounting and Tax Considerations

 

Accounting Considerations

 

Based on accounting guidance for compensation arrangements, no compensation expense is recognized with respect to Class B Interests issued pursuant to the Management Investment Opportunity as the units were purchased by participants for fair value. 

 

Under the SARs Plan and related 2012 SARs Exercise Opportunity, while the SARs were outstanding, amounts equal to dividends that are paid in respect of Oncor membership interests are credited to the SARs holder’s account as if the SARs were units of Oncor, payable upon the earliest to occur of death, disability, separation from service, unforeseeable emergency or a change in control.  As payments under the dividend provision are not contingent upon a future liquidity event, the liability related to the declared dividends is accrued as vested. For accounting purposes, the liability is discounted based on an employee’s expected retirement date.  

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Income Tax Considerations

 

Section 162(m) of the Code limits the tax deductibility by a publicly held company of compensation in excess of $1 million paid to the CEO or any other of its three most highly compensated executive officers other than the principal financial officer.  Because we are a privately-held limited liability company, Section 162(m) will not limit the tax deductibility of any executive compensation for 2015.

 

The O&C Committee administers our compensation programs with the good faith intention of complying with Section 409A of the Code.

 

The information contained herein under the heading “Organization and Compensation Committee Report” is not to be deemed to be “soliciting material” or “filed” with the SEC pursuant to Section 407(e)(5) of SEC Regulation S-K.

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Organization and Compensation Committee Report

 

The Organization and Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis set forth in this Form 10-K.  Based on such review and discussions, the committee recommended to the board of directors that the Compensation Discussion and Analysis be included in this Form 10-K.

 

Organization and Compensation Committee

 

Richard W. Wortham III, Chair

Thomas M. Dunning

Thomas D. Ferguson

Steven J. Zucchet

 

Compensation Committee Interlocks and Insider Participation

 

Two of our O&C Committee members, Messrs. Ferguson and Zucchet, are not classified as independent directors under the standards set forth in the Limited Liability Company Agreement.  Mr. Ferguson is a managing director of Goldman, Sachs, & Co., a member of the Sponsor Group, and also serves on the board of EFH Corp. and the board of managers of EFIH. Mr. Ferguson was appointed to our board of directors by Oncor Holdings at the direction of EFIH. Mr. Zucchet is employed by Borealis Infrastructure Management, Inc., a beneficial owner of Texas Transmission, and serves as an officer and director of Texas Transmission’s parent company.  Mr. Zucchet was appointed to the board of directors by Texas Transmission. Until his resignation from our board of directors on January 22, 2015, Jeffrey Liaw also served as a member of the O&C Committee.  Mr. Liaw was not classified as an independent director under the standards set forth in the Limited Liability Company Agreement.  Mr. Liaw is a former principal of TPG, a member of the Sponsor Group, and a manager of Texas Energy Future Capital Holdings LLC, the sole general partner of Texas Holdings. Mr. Liaw was appointed to the board of directors by Oncor Holdings, which is a subsidiary of EFH Corp. Mr. Liaw also served as a member of the EFH Corp. board of directors until December 31, 2012.  For a description of the ability of Oncor Holdings and Texas Transmission to appoint directors, see “Directors, Executive Officers and Corporate Governance – Director – Director Appointments.”  For a description of Oncor related-party transactions involving the Sponsor Group, EFH Corp. and Texas Transmission, see “Certain Relationships and Related Transactions, and Director Independence.”

 

No member of the O&C Committee is or has ever been one of our officers or employees.  No interlocking relationship exists between our executive officers and the board of directors or compensation committee of any other company.

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Summary Compensation Table

 

The following table provides information, for the fiscal years ended December 31, 2015, 2014, and 2013 regarding the aggregate compensation paid to our Named Executive Officers.

 

 

 

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2015 All Other Compensation Components for Named Executive Officers

 

 

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2015 Perquisites for Named Executive Officers

 

 

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(1)Amounts in this column represent spouse expenses for accompanying the Named Executive Officer on business travel.

(2)Amounts in this column represent the cost of event tickets for personal entertainment.

 

 

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Grants of Plan-Based Awards – 2015

 

The following table sets forth information regarding grants of plan-based awards to Named Executive Officers under our Executive Annual Incentive Plan and Long-Term Incentive Plan during the fiscal year ended December 31, 2015.  

 

 

 

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Executive Annual Incentive Plan

 

The Executive Annual Incentive Plan is a cash bonus plan intended to provide a performance-based annual reward for the successful attainment of certain annual performance goals and business objectives that are established by the O&C Committee.  Elected officers of the Company having a title of vice president or above and other specified key employees are eligible to participate in the Executive Annual Incentive Plan provided they are employed by us for a period of at least three full months during a January 1 to December 31 plan year.  The O&C Committee and our CEO are responsible for administering the Executive Annual Incentive Plan.  Participants who die, become disabled or retire during a plan year are eligible to receive prorated awards under the plan for that plan year provided they completed at least three full months of employment in such plan year. Any awards to executive officers are in the sole discretion of the O&C Committee, and such awards are prorated for the number of months in which the individual was employed by the company.

 

Funding for awards payable in any given plan year is determined based on  a funding trigger based on Oncor’s EBITDA and any additional operational or other metrics that the O&C Committee elects to apply in determining the aggregate amount of awards.  Based on the level of attainment of these EBITDA and operational metrics targets, the O&C Committee determines an aggregate final funding percentage.  This final funding percentage is multiplied by target awards, which amount is then multiplied by individual performance modifiers to provide the final Executive Annual Incentive Plan award. Each step in the calculation process is described in more detail below

 

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Step 1: EBITDA Achievement

 

Incentives are only payable under the Executive Annual Incentive Plan in the event the threshold EBITDA funding trigger is achieved.  The level of EBITDA achieved is used to calculate a funding trigger percentage as illustrated in the table below.

 

 

 

For 2015, the EBITDA funding triggers (threshold,  target and superior), actual results and funding trigger percentage under the Executive Annual Incentive Plan were as follows:

 

 

 

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Step 2: Operational Achievement

 

If the threshold EBITDA funding trigger is achieved, then once the EBITDA funding percentage is determined, the operational or other metrics set by the O&C Committee are then applied to determine an operational funding percentage.  For 2015, the O&C Committee only used operational metrics, which are set forth in the table below.

 

 

For further information on the operational metrics, see “Compensation Discussion and Analysis—Compensation Elements—Executive Annual Incentive Plan.”

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The O&C Committee determines the weighting of each of those metrics within the final operational funding percentage.  As with the EBITDA funding trigger, each operational metric must meet a threshold level in order to provide any funding for that metric.  Meeting the threshold amount results in 50% of the available funding for that specific metric.  The O&C Committee also sets target and superior levels for each operational metric, and achievement of those levels results in funding for a specific metric of 100% and 150%, respectively.  Once threshold has been achieved, actual results in between each level result in a funding percentage equal to the percentage of the target achieved (up to 150%, for achievement of the superior performance level).  For 2015, the weighting, actual results and operational funding percentages for the operational metrics under the Executive Annual Incentive Plan were as follows:

 

 

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For 2015, achievement of operational metrics resulted in an operational funding percentage of 122.4%. The operational funding percentage can increase or decrease the final funding percentage, as described in more detail below. 

 

 

Step 3: Determining Final Funding Percentage

 

After a funding trigger percentage and operational funding percentage are determined, a final funding percentage is calculated in accordance with the following table.

 

 

For 2015, since actual EBITDA exceeded the target EBITDA, the final funding percentage was calculated using the funding trigger percentage multiplied by the operational funding percentage, up to a payout percentage not exceeding the funding trigger percentage, resulting in a final funding percentage of 100.5%.

 

 

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Step 4: Final Award Determination 

 

To calculate an executive officer’s award amount, the final funding percentage is first multiplied by the executive officer’s target award, which is computed as a percentage of actual base salary.  Based on the executive officer’s performance, an individual performance modifier is then applied to the calculated award to determine the final incentive payment.  An individual performance modifier is based on reviews and evaluations of the executive officer’s performance by the CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) and may adjust an award upward or downward.  The individual performance modifier is determined on a subjective basis.  Factors used in determining individual performance modifiers may include operational measures (including the safety, reliability, operational efficiency metrics and infrastructure readiness discussed above), company objectives, individual management and other goals, specific job objectives and competencies, the demonstration of team building and support attributes and general demeanor and behavior.  The CEO and the O&C Committee (or solely the O&C Committee in the case of our CEO) do not assign these factors individual weights, but consider them together.  The O&C Committee applied individual modifiers to 2015 Named Executive Officer awards in the amount of 140% for Messrs. Shapard, Davis and Nye and 120% for Messrs. Clevenger and Greer.

 

Long-Term Incentive Plan

 

Our board of directors adopted the Long-Term Incentive Plan effective January 1, 2013 and delegated administration of the Long-Term Incentive Plan to the O&C Committee.  Our executive officers and any other key employees of the company or its subsidiaries designated by the O&C Committee are eligible to participate.  The plan provides for cash awards to be paid after completion of a performance period based on achievement of certain stated performance goals.  A performance period under the Long-Term Incentive Plan is the 36 month period beginning each January 1, unless otherwise determined by the O&C Committee in its sole discretion.  The participants for each performance period shall be determined by the O&C Committee not later than the 90th day after commencement of the performance period.  Performance goals consist of one or more specific performance objectives established by the O&C Committee in its discretion within the first 90 days of the commencement of the applicable performance period. Performance goals may be designated with respect to the company as a whole or one or more operating units, and may also be determined on an absolute basis or relative to internal goals, or relative to levels attained in prior years, or relative to other companies or indices, or as ratios expressing relationships between two or more performance goals.

 

The O&C Committee determined that the performance goals used for the Long-Term Incentive Plan awards granted in 2015 would consist of both a financial trigger and operational metrics, as set forth below.

 

 

 

 

The funding of each Long-Term Incentive Plan award granted to date is contingent first upon Oncor achieving a cumulative threshold net income level for the three year period. If Oncor fails to achieve the stated net income level for the

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performance period, no award is payable. For Long-Term Incentive Plan awards granted in 2015 or after, the funding trigger percentage for a performance period equals 50% if the threshold level is met, 100% if target level is met, or 150% if the superior level is met or exceeded. (For awards granted in 2013 and 2014, however, there is no superior level funding trigger). The applicable percentage for performance between threshold and target performance levels, and the target and superior performance levels are determined on a straight line interpolation basis.

 

Once a funding trigger percentage is determined, an operational goal percentage is determined based on Oncor’s satisfaction of four operational metrics. The operational goals used for the Long-Term Incentive Plan awards mirror the operational metrics used for awards under the Executive Annual Incentive Plan.  The table below sets forth the operational goals that the O&C Committee applied for 2015 grants.

 

 

 For further information on the operational goals, which are identical to the operational metrics in the Executive Annual Incentive Plan, see “Compensation Discussion and Analysis—Compensation Elements—Executive Annual Incentive Plan.”

 

The O&C Committee sets the threshold, target and superior levels for each operational metric. The achievement of those levels results in funding for a specific metric of 50%, 100% and 150%, respectively. Once the threshold has been achieved, actual results in between each level result in a funding percentage equal to the percentage of the target achieved. Based on the weighting for each operational metric, an aggregate weighted average of operational goal percentage is determined.

 

The final funding percentage for long-term incentive awards is then calculated using the funding trigger percentage and weighted operational goal percentage, as set forth in the table below.

 

 

The amount of each Long-Term Incentive Plan award granted in 2015 or later is then determined based on the product of the final funding percentage, multiplied by the target opportunity dollar amount stated in each individual award. The O&C Committee amended the form of award agreement in March 2015 to apply this calculation to all Long-Term Incentive Plan awards granted in 2015 or later. For awards granted in 2013 and 2014, the form of award agreement provides that final awards are based on the product of (i) the funding trigger percentage, multiplied by (ii) the weighted

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average of stated operational goal percentages, multiplied by (iii) the target opportunity dollar amount stated in each individual award letter.

 

In February 2016, the O&C Committee certified the level of attainment of performance goals established for long-term incentive awards granted in 2013 with a performance period that ended on December 31, 2015. The performance goals achieved for the 2013-2015 performance goal period were certified by the O&C Committee as follows:

 

 

 

The O&C Committee certified a funding trigger percentage of 100% and a performance goal percentage of 114.8% for the 2013-2015 performance period, resulting in long-term incentive awards as follows for the Named Executive Officers: Mr. Shapard: $2,211,507, Mr. Davis: $633,696, Mr. Clevenger: $616,797, Mr. Greer: $633,696, and Mr. Nye: $718,189. These amounts will be paid to such officers on or before April 1, 2016.

 

Under the terms of the Long-Term Incentive Plan, the O&C Committee must measure and certify the levels of attainment of performance goals within 90 days following the completion of the performance period.  Any awards for such period shall be paid on or about April 1 following the performance period, but in no event later than the end of the calendar year following the end of the applicable performance period.  At the discretion of the O&C Committee, individuals newly hired or promoted into positions that qualify to participate in the Long-Term Incentive Plan may begin participating in the plan for one or more open performance periods on a full or pro-rata basis upon the date of hire or promotion.

 

The Long-Term Incentive Plan encourages retention of executive officers and key employees by stipulating performance periods of generally 36 months. Participants must be continuously employed by us through the last day of the performance period in order to receive a long-term incentive award for that performance period. If a participant is employed by us on the last day of the performance period but his/her employment terminates for any reason other than by us for cause prior to the payment of the award for that performance period, the participant will be entitled to receive payment of the award. In the event a participant is terminated by us for cause, the participant will forfeit any unpaid Long-Term Incentive Plan award.  For purposes of the Long-Term Incentive Plan, “cause” has the same meaning as defined in any employment agreement or change-in-control agreement of such participant in effect at the time of termination of employment.  If there is no such employment or change-in-control agreement, “cause” means (i) the indictment on or pleading guilty or nolo contendere to, a felony or misdemeanor involving moral turpitude of such participant, or upon the participant, in the carrying out his or her duties to the company, (ii) engaging in conduct that causes a breach of his/her fiduciary duties to us, our subsidiaries or our investors, (iii) committing an act of gross negligence, or (iv) committing gross misconduct resulting in material economic harm to us. If a participant’s employment is terminated for reasons other than death, disability, retirement or following a change in control prior to the last day of the performance period, all of such participant’s outstanding and unpaid Long-Term Incentive Plan awards will be cancelled. Upon a termination due to death, disability or retirement, for each outstanding Long-Term Incentive Plan unpaid award, the participant (or his/her

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beneficiary in the case of death) will be entitled to receive, on the same date as awards are paid for that period to other participants, an award equal to the product of (i) a fraction, the numerator of which is the number of days in the performance period up to and including the date of the separation of service and the denominator of which is the number of days in the entire performance period, and (ii) the Long-Term Incentive Plan award for such performance period based on actual performance of Oncor during the performance period.  In the event of a termination following a change in control, a participant shall be entitled to receive, within 60 days following the separation from service, an award equal to the product of (i) a fraction, the numerator of which is the number of days in the performance period up to and including the date of the separation of service and the denominator of which is the number of days in the entire performance period, and (ii) the Long-Term Incentive Plan award for such performance period based on target performance.

 

For purposes of the Long-Term Incentive Plan, a “change in control” means, in one or a series of related transactions, (i) the sale of all or substantially all of the consolidated assets or capital stock of EFH Corp., Oncor Holdings, or Oncor to a person (or group of persons acting in concert) who is not an affiliate of any member of the Sponsor Group; (ii) a merger, recapitalization or other sale by EFH Corp., any member of the Sponsor Group or their affiliates, to a person (or group of persons acting in concert) that results in more than 50% of EFH Corp.’s common stock (or any resulting company after a merger) being held by a person (or group of persons acting in concert) that does not include any member of the Sponsor Group or any of their respective affiliates; or (iii) a merger, recapitalization or other sale of common stock by EFH Corp., any member of the Sponsor Group or their affiliates, after which the Sponsor Group owns less than 20% of the common stock of, and has the ability to appoint less than a majority of the directors to the board of directors of, EFH Corp. (or any resulting company after a merger); and with respect to any of the events described in clauses (i) and (ii) above, such event results in any person (or group of persons acting in concert) gaining control of more seats on the board of directors of EFH Corp. than the Sponsor Group. However, the Long-Term Incentive Plan also provides that should a change in control occur under clauses (i) through (iii) above with respect to the assets or capital stock of EFH Corp., a change in control will not be deemed to have occurred unless the change in control would result in the material amendment or interference with the separateness undertakings set forth in our Limited Liability Company Agreement, or would adversely change or modify the definition of an independent director in our Limited Liability Company Agreement.

 

As the administrator of the Long-Term Incentive Plan, the O&C Committee has the authority to prescribe, amend and rescind rules and regulations relating to the plan, determine the terms and conditions of any awards and make all other determinations deemed necessary or advisable for the administration of the plan. The O&C Committee has broad discretion under the plan and may delegate to one or more officers of the company the authority to grant Long-Term Incentive Plan awards to employees who are not executive officers. Our board of directors may at any time terminate, alter, amend or suspend the Long-Term Incentive Plan and any awards granted pursuant to it, subject to certain limitations. In the event of a change in control, our board of directors may, in its discretion, terminate the plan and cancel all outstanding and unpaid awards, except that in the event of a termination of the plan in connection with a change in control, participants will be entitled to receive the payout as described above.  Payments under the Long-Term Incentive Plan are separate from, and would be in addition to, any payments available under the Change in Control Policy or Severance Plan.

 

Equity Interests Plan and Management Investment Opportunity

 

The Equity Interests Plan allows our board of directors to offer non-employee directors, management and other personnel and key service providers of Oncor the right to invest in Class B membership units of Investment LLC (each, a Class B Interest), an entity whose only assets consist of equity interests in Oncor.  As a result, each holder of Class B Interests holds an indirect ownership interest in Oncor.  Any dividends received by Investment LLC from Oncor in respect of its membership interests in Oncor are subsequently distributed by Investment LLC to the holders of Class B Interests in proportion to the number of Class B Interests held by such holders.

 

Our board of directors administers the Equity Interests Plan.  As the plan administrator, our board of directors determines the participants, the number of Class B Interests offered to any participant, the purchase price of the Class B Interests and the other terms of the award.  Our board of directors may also amend, suspend or terminate the Equity Interests Plan at any time.  Upon purchasing any Class B Interests, participants may be required to enter into certain agreements with the Company and Investment LLC, including a management stockholder’s agreement and a sale participation agreement described below.  The Equity Interests Plan will terminate on November 5, 2018 or an earlier or a later date determined by our board of directors.

 

In 2008, our executive officers and certain key employees were given the option to purchase Class B Interests of Investment LLC pursuant to the 2008 Management Investment Opportunity offered under the Equity Interests Plan.  Each

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participant in the 2008 Management Investment Opportunity purchased Class B Interests at a price of $10.00 per unit, which was the same price per unit as paid by Texas Transmission in connection with its November 2008 investment in Oncor.   Refer to “– Compensation Discussion and Analysis – Compensation Elements – Long Term Incentives – Equity Interests Plan and Management Investment Opportunity” for a more detailed discussion of the Equity Interests Plan and Management Investment Opportunity.

 

In connection with the Management Investment Opportunity, each participant entered into a management stockholder’s agreement and a sale participation agreement.  The management stockholder’s agreement, among others things, gives Oncor the right to repurchase a participant’s Class B Interests in the event of specified terminations of a participant’s employment or violation by a participant of certain of his or her non-compete obligations.  We believe this repurchase right provides significant retentive value to our business.  For a more detailed description of the terms of the management stockholder’s agreement and sale participation agreement, see “Certain Relationships and Related Transactions, and Director Independence – Related Party Transactions – Agreements with Management and Directors.”

 

The Named Executive Officers beneficially own the following amounts of Class B Interests: Mr. Shapard: 300,000; Mr. Davis: 50,000; Mr. Clevenger 50,000; Mr. Greer: 75,000; and Mr. Nye 18,368. The amounts of Class B Interests each participant could purchase were determined by the O&C Committee. Each participant was permitted to use his funds in the Salary Deferral Program to purchase the Class B Interests.  All Class B Interests purchased using funds held in the Salary Deferral Program are held of record by the Salary Deferral Program for the benefit of the respective participants.  Messrs. Davis, Clevenger and Greer each elected to purchase Class B Interests using Salary Deferral Program funds.  As a result, 19,868 of Mr. Davis’s Class B Interests, 8,703 of Mr. Clevenger’s Class B Interests and 25,000 of Mr. Greer’s Class B Interests are held of record by the Salary Deferral Program.

 

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Pension Benefits

 

The following table sets forth information regarding Oncor’s participation in the retirement plans that provide for benefits, in connection with, or following, the retirement of Named Executive Officers for the fiscal year ended December 31, 2015:

 

 

 

_____________

 

The Oncor Retirement Plan contains both a traditional defined benefit component and a cash balance component.  Only employees hired before January 1, 2002 may participate in the traditional defined benefit component.  All new employees hired after January 1, 2002 participate in the cash balance component.  In addition, the cash balance component covers employees previously covered under the traditional defined benefit component who elected to convert the actuarial equivalent of their accrued traditional defined benefit to the cash balance component during a special one-time election opportunity effective in 2002.  The employees that participate in the traditional defined benefit component do not participate in the cash balance component.

 

Annual retirement benefits under the traditional defined benefit component, which applied during 2015 to Messrs. Davis and Greer, are computed as follows: for each year of accredited service up to a total of 40 years, 1.3% of the first $7,800, plus 1.5% of the excess over $7,800, of the participant’s average annual earnings (base salary) during his/her three years of highest earnings.  Under the cash balance component, which covers Messrs. Shapard, Clevenger and Nye, a hypothetical account is established for participants and credited with monthly contribution credits equal to a percentage of the participant’s compensation (3.5%, 4.5%, 5.5% or 6.5% depending on the participant’s combined age and years of accredited service), plus interest credits based on the average yield of the 30-year Treasury bond for the 12 months ending November 30 of the prior year.  Benefits paid under the traditional defined benefit component of the Oncor Retirement Plan are not subject to any reduction for Social Security payments but are limited by provisions of the Code.

 

The Supplemental Retirement Plan provides for the payment of retirement benefits, which would otherwise be limited by the Code or the definition of earnings under the Oncor Retirement Plan, including any retirement compensation required to be paid pursuant to contractual arrangements. Under the Supplemental Retirement Plan, retirement benefits are calculated in accordance with the same formula used under the Oncor Retirement Plan, except that, with respect to calculating the portion of the Supplemental Retirement Plan benefit attributable to service under the traditional defined

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benefit component of the Oncor Retirement Plan, earnings also include Executive Annual Incentive Plan awards.  The amount of earnings attributable to the Executive Annual Incentive Plan awards is reported under the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.

 

The table set forth above illustrates the present value on December 31, 2015 of each Named Executive Officer’s Retirement Plan benefit and benefits payable under the Supplemental Retirement Plan, based on his or her years of service and remuneration through December 31, 2015.  Benefits accrued under the Supplemental Retirement Plan after December 31, 2004 are subject to Section 409A of the Code.  Accordingly, certain provisions of the Supplemental Retirement Plan have been modified in order to comply with the requirements of Section 409A and related guidance.

 

The present value of accumulated benefits for the traditional benefit component of the Oncor Retirement Plan and Supplemental Retirement Plan was calculated based on the executive’s annuity payable at the earliest age that unreduced benefits are available under the Plans (generally age 62).  Unmarried executives are assumed to elect a single life annuity.  For married executives, it is assumed that 65% will elect a 100% joint and survivor annuity and 35% will elect a single life annuity.  Post-retirement mortality was based on the RP-2006 Fully Generational Mortality Table for Healthy Annuitants using projection scale MP-2015.  A discount rate of 4.28% was applied, and no pre-retirement mortality or turnover was reflected.

 

The present value of accumulated benefit for the cash balance component of the Oncor Retirement Plan and the Supplemental Retirement Plan was calculated as the value of the executive’s cash balance account projected to age 65 at an assumed growth rate of 4.00% and then discounted back to December 31, 2015 at 4.28%. No mortality or turnover assumptions were applied.

 

Early retirement benefits under the Oncor Retirement Plan are available to all of our employees upon their attainment of age 55 and achievement of 15 years of accredited service.  Early retirement results in a retirement benefit payment reduction of 4 percent for each full year (and 0.333% for each additional full calendar month) between the date the participant retires and the date the participant would reach age 62.  Benefits under the Supplemental Retirement Plan are subject to the same age and service restrictions, but are only available to our executive officers and certain other key employees.

 

Nonqualified Deferred Compensation – 2015

 

The following table sets forth information regarding the deferral of components of our Named Executive Officers’ compensation on a basis that is not tax-qualified for the fiscal year ended December 31, 2015: 

 

 

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Salary Deferral Program

 

Under the Salary Deferral Program, each employee of Oncor, who is in a designated job level and whose annual salary is equal to or greater than an amount established under the Salary Deferral Program ($122,310 for the program year beginning January 1, 2015) may elect to defer up to 50% of annual base salary, and/or up to 85% of any bonus or incentive award.  This deferral (including any vested matching contributions, as described below) may be made for a period of seven years, for a period ending with the retirement of such employee, or for a combination thereof, at the election of the employee.  Oncor makes a matching award, subject to forfeiture under certain circumstances, equal to 100% of up to the first 8% of salary deferred under the Salary Deferral Program. Oncor does not match deferred annual incentive awards.  Matching contributions vest at the earliest of seven years after the deferral date, executive’s retirement or a change in control of Oncor (as defined in the Salary Deferral Program).

 

In February 2015, our board of directors approved an amendment to the Salary Deferral Program that allows Oncor, at the direction of the O&C Committee, to make additional discretionary contributions into a Salary Deferral Program participant’s account. The amendment provides that the amount and vesting parameters of any such discretionary contribution shall be determined by the O&C Committee. Discretionary contributions made into a Salary Deferral Program participant’s account by Oncor vest as determined by the O&C Committee. In February 2015, in connection with the Salary Deferral Program amendment, the O&C Committee approved a discretionary contribution into the Salary Deferral Program account of Mr. Shapard, our CEO, in order to correct a company administrative error that resulted in Mr. Shapard not being enrolled in the thrift plan for approximately two years, from 2007-2009. To compensate for this administrative error, the O&C Committee approved our payment of a discretionary contribution to Mr. Shapard’s Salary Deferral Program account in the amount of $93,060. The contribution is fully vested in his account as of the date made, and the contribution is eligible for distribution to Mr. Shapard upon his retirement, as defined under the Salary Deferral Program.

 

Deferrals are credited with earnings or losses based on the performance of investment alternatives under the Salary Deferral Program selected by each participant.  Among the investment alternatives, certain participants were eligible to use funds in the Salary Deferral Program to purchase Class B Interests in November 2008 pursuant to the Equity Interests Plan and Management Investment Opportunity. For additional information regarding the Equity Interests Plan and Management Investment Opportunity, see “Long Term Incentives - Equity Interests Plan and Management Investment Opportunity.” Distributions from Oncor to Investment LLC are distributed pro rata to the holders of Class B Interests in accordance with their proportionate ownership of Class B Interests. Any distributions attributable to Class B Interests purchased using a participant’s funds in the Salary Deferral Program are deposited in such participant’s Salary Deferral Program account as earnings.

 

At the end of the applicable account maturity period (seven years or retirement, as elected by the participant or, in the case of company discretionary contributions, as determined by the O&C Committee) the trustee for the Salary Deferral Program distributes the deferrals and the applicable earnings in cash as a lump sum or in annual installments at the participant’s election made at the time of deferral.  Oncor is financing the retirement option portion of the Salary Deferral Program through the purchase of corporate-owned life insurance on lives of some participants.  The proceeds from such insurance are expected to allow us to fully recover the cost of the retirement option.

 

 

Potential Payments upon Termination or Change in Control

 

The tables and narrative below provide information for payments to Oncor’s Named Executive Officers (or, as applicable, enhancements to payments or benefits) in the event of termination including retirement, voluntary, for cause, death, disability, without cause or change in control of Oncor.  The amounts shown below assume that such a termination of employment and/or change in control occurred on December 31, 2015.

 

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In 2015, all of our executive officers were eligible to receive benefits under the terms of the Change in Control Policy and the Severance Plan, as more fully described following the tables below.  In addition to the provisions of those plans, the Salary Deferral Program provides that all company-matching awards will become automatically vested in the event of a termination without cause following a change in control, death, disability or retirement.  The amounts listed in the tables below regarding the Salary Deferral Program only represent the immediate vesting of company matching contributions resulting from death, disability or a termination without cause following the occurrence of a change in control.  Vested amounts and contributions made to such plan by each Named Executive Officer are disclosed in the Nonqualified Deferred Compensation table above.  For a more detailed discussion of the Salary Deferral Program, see the Nonqualified Deferred Compensation table above and the narrative following the Nonqualified Deferred Compensation table.

 

Early retirement benefits under the Oncor Retirement Plan are available to all of our employees upon their attainment of age 55 and achievement of 15 years of accredited service.  Early retirement results in a retirement benefit payment reduction of 4 percent for each full year (and 0.333% for each additional full calendar month) between the date the participant retires and the date the participant would reach age 62.  Benefits under the Supplemental Retirement Plan are subject to the same age and service restrictions, but are only available to our executive officers and certain other key employees.  At December 31, 2015, Messrs. Clevenger and Nye were not eligible to retire because they had not met the age requirement.  Mr. Shapard participates in the cash balance component of the retirement plans, and because he has satisfied both the age requirement and 10 years of accredited service, he may withdraw his full account balances under each plan upon termination of his employment.  Messrs. Davis and Greer participate in the traditional defined benefit component of the retirement plans, and because they have satisfied both the age requirement and 15 years of accredited services, they are eligible to retire early upon termination of employment.    No additional potential payments will be triggered by any termination of employment or change in control, and as a result no amounts are reported in the tables below for such retirement plans.  For a more detailed discussion of the retirement plans, see the Pension Benefits table above and the narrative following the Pension Benefits table.

 

All our Named Executive Officers participate in benefit plans for group term life insurance and accidental death and disability.  Any benefits received under these policies are paid to the beneficiary by a third-party provider. 

 

In connection with the November 2012 SARs Exercise Opportunity, each SARs holder agreed that no further dividends would accumulate following such exercise, and that interest would accrue on their existing dividend accounts until such dividends were paid in accordance with the terms of the SARs Plan. The dividends and interest are payable when dividends would become payable under the SARs Plan, generally upon a participant’s death, disability, separation from service, unforeseeable emergency, or a change in control, each as defined by section 409A of the Internal Revenue Code.

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1.  Mr. Shapard

 

Potential Payments to Mr. Shapard Upon Termination ($)

 

 

_______________

 

 

 

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2.  Mr. Davis

 

Potential Payments to Mr. Davis Upon Termination ($)

 

_________________

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3.  Mr. Clevenger

 

Potential Payments to Mr. Clevenger Upon Termination ($)

 

_________________

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4.  Mr. Greer

 

Potential Payments to Mr. Greer Upon Termination ($)

 

_________________

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5.  Mr. Nye

 

Potential Payments to Mr. Nye Upon Termination ($)

 

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Change in Control Policy

 

We maintain a Change in Control Policy for our executive team, which consists of our executive officers and certain non-executive vice presidents.  The purpose of this Change in Control Policy is to provide the payment of transition benefits to eligible executives if:

 

 

The Change in Control Policy provides for the payment of transition benefits to eligible executives if any of the following occur within 24 months following a change in control:

 

 

“Change in control” is defined in the Change in Control Policy as the occurrence of the following events: (a) the Sponsor Group ceases to beneficially own (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) a majority of our or our successor’s (by consolidation or merger) outstanding equity interest; (b) any sale, lease, exchange or other transfer (in one transaction or in a series of related transactions) of all, or substantially all, of our assets, other than to an entity (or entities) of which the Sponsor Group beneficially owns a majority of the outstanding equity interest; (c) individuals who as of August 1, 2015 constitute our board of directors (the Incumbent Board) cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to August 1, 2015 whose election or nomination for election was approved by a vote of at least seventy-five percent (75%) of the directors comprising the Incumbent Board  shall be, for purposes of this clause (c) considered as though such person were a member of the Incumbent Board; or (d) the consummation of a court-approved plan of reorganization in the proceeding styled In re Energy Future Holdings Corp., et al., Case No. 14-10979 (CSS), pending in the United States Bankruptcy Court for the District of Delaware.  For purposes of this definition, the term “Sponsor Group” shall mean investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P., TPG Capital, L.P. and Goldman Sachs & Co.

 

Our executive officers are eligible to receive the following under the Change in Control Policy:

 

 

The Change in Control Policy contains a one year non-solicitation period and provisions regarding confidentiality and non-disparagement and attaches a form of release agreement that each executive is required to sign prior to receipt of benefits under the policy.  The Change in Control Policy also provides that for a period of one year after a termination contemplated by the plan, a participant may not recruit, solicit, induce or in any way cause any employee, consultant or contractor engaged by Oncor to terminate his/her relationship with Oncor. The Change in Control Policy may be amended by our board of directors or a duly authorized committee of our board of directors at any time, except that any amendments that materially decrease the benefits available to eligible participants cannot be made within 24 months of a change in control or while the company is in the process of negotiating a potential transaction that could constitute a change in control.  

 

Severance Plan

 

We maintain the Severance Plan for our executive team, which consists of our executive officers and certain non-executive vice presidents.  The purpose of the Severance Plan is to provide benefits to eligible executives who are not eligible for severance pursuant to another plan or agreement (including an employment agreement) and whose employment is involuntarily terminated for reasons other than:

 

 

The Severance Plan provides for severance payments to executives whose employment is involuntarily terminated for reasons other than:

 

Our executive officers are eligible to receive the following under the Severance Plan:

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In order to receive benefits under the plan, a participant must enter into an agreement and release within 45 days of being notified by us of such participant’s eligibility to receive benefits under the plan. The Severance Plan also provides that for a period of one year after a termination contemplated by the plan, a participant may not recruit, solicit, induce or in any way cause any employee, consultant or contractor engaged by Oncor to terminate his/her relationship with Oncor. The Severance Plan also contains provisions relating to confidentiality and non-disparagement.

 

Long-Term Incentive Plan

 

For information concerning change of control and termination payouts for awards granted under the Long-Term Incentive Plan, see the narrative that follows the Grants of Plan- Based Awards – 2015 table.

 

 

Risk Assessment of Compensation Policies and Practices

 

The O&C Committee reviews the compensation policies and practices applicable to Oncor’s employees (both executive and non-executive) annually each February in order to determine whether such compensation policies and practices create risks that are reasonably likely to have a material adverse effect on Oncor. In February 2016 the O&C Committee concluded that current compensatory policies and practices do not create risks that are reasonably likely to have a material adverse effect on Oncor.  In arriving at this conclusion, the O&C Committee discussed with management the various compensation policies and practices of the company and the compensation payable pursuant to each, and evaluated whether the compensation payable under each plan or policy could result in (i) incenting employees to take risks that could result in a material adverse effect to Oncor, or (ii) payments by the company significant enough to cause a material adverse effect to Oncor.

 

We believe that the following factors in our employee compensation program limit risks that could be reasonably likely to have a material adverse effect on the company:

 

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Director Compensation

 

The table below sets forth information regarding the aggregate compensation paid to the members of the board of directors during the fiscal year ended December 31, 2015.  Directors who are officers of Oncor and directors who are not independent directors (as defined in the Limited Liability Company Agreement) do not receive any fees for service as a director.  Oncor reimburses all directors for reasonable expenses incurred in connection with their services as directors.

 

 

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The O&C Committee determines compensation for independent directors that serve on the board of directors. All director fees are paid quarterly, in arrears.  Each of our independent directors serving in such role as of the end of each quarter of 2015 received a quarterly fee of $38,250 for service on our board of directors, and an additional quarterly fee of $4,250 for service on the Oncor Holdings’ board of directors. As Mr. Adams did not join our board of directors and the board of directors of Oncor Holdings until July 2015, he received the additional quarterly independent director fees with respect to the third and fourth quarters of 2015 only.

 

In addition to the retainer fees discussed above, each board committee chair receives an additional $3,750 quarterly fee for the extra responsibilities associated with such position, our lead independent director (Mr. Dunning) receives an additional $12,500 quarterly fee for the additional duties associated with that position, our chairman (Mr. Adams) receives an additional $37,500 quarterly fee for the additional duties associated with that position and each of our Special Independent Directors (as defined in our Limited Liability Company Agreement) receives an additional quarterly fee of $5,000 to compensate for their additional responsibilities as Special Independent Directors. As Mr. Adams did not join our board of directors and the board of directors of Oncor Holdings until July 2015, he received the additional quarterly chairman fees with respect to the third and fourth quarters of 2015 only. For a description of the independence standards applicable to our independent directors, see “Certain Relationships and Related Transactions, and Director Independence.”

 

Our independent directors may also receive an additional potential annual cash payment of up to $80,000, paid quarterly, in arrears, as may be determined in the discretion of the board of directors during the fourth quarter of each calendar year in recognition of the additional time commitments and responsibilities to Oncor business matters expected to be required of independent directors in the following calendar year. In the fourth quarter of each of 2013, 2014 and 2015, the board of directors approved such an additional annual cash payment to the independent directors for each of the 2014, 2015 and 2016 calendar years, respectively, each in the amount of $80,000, payable in four equal installments following the end of each calendar quarter in recognition of the additional time commitments and responsibilities expected to be required of them in that calendar year. Each of our independent directors serving in such role as of the end of each quarter of 2015 received an additional quarterly cash payment of $20,000, paid in arrears. Since Mr. Adams did not join our board of directors until July 2015, he only received the additional quarterly cash payments of $20,000 with respect to the third and fourth quarters of 2015.

 

In October 2014 and 2015, the O&C Committee engaged PricewaterhouseCoopers LLP to conduct competitive market analyses of independent directors compensation, using the same peer group and methodology used in the October 2015 analysis of executive compensation. See “Executive Compensation - Compensation Discussion and Analysis –

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Overview – Market Data” for a description of this peer group and methodology.  No changes to director compensation were made as a result of this review.

 

Our LLC Agreement provides that each of the Sponsor Group and Texas Transmission has the right to appoint two directors to our board of directors. None of those four director positions (currently held by Messrs. Evenden, Ferguson and Zucchet); the remaining position is vacant) receives compensation from us for his service as a director.

 

Purchases of Class B Interests

 

Eligible participants in the Equity Interests Plan include non-employee directors, and our board of directors has granted independent directors the option to purchase Class B Interests pursuant to the Equity Interests Plan.  For a description of the Equity Interests Plan, see “– Elements of Compensation – Long-Term Incentives – Equity Interests Plan and Management Investment Opportunity.”

 

Effective January 2009 four of our independent directors at the time, Messrs. Dunning, Estrada, Ford and Wortham, purchased the following amounts of Class B Interests pursuant to the Equity Interests Plan: Dunning: 20,000, Estrada: 5,000, Ford: 20,000 and Wortham: 10,000. Similar to the Management Investment Opportunity, these Class B Interests were purchased at a price of $10.00 per unit.  In connection with their investments, these directors entered into director stockholder agreements and sale participation agreements.  For a description of the material terms of these agreements, see “Certain Relationships and Related Transactions, and Director Independence – Related Party Transactions – Agreements with Management and Directors.”

 

In connection with these investments, Oncor Holdings sold 55,000 of its equity interests in Oncor to Investment LLC at a price of $10.00 per unit pursuant to the terms of a revolving stock purchase agreement.  For a description of the revolving stock purchase agreement, see “– Elements of Compensation – Long-Term Incentives – Equity Interests Plan and Management Investment Opportunity.”

 

Director Stock Appreciation Rights Settlement

 

In February 2009, Oncor implemented the Director SARs Plan to allow participants to participate in the economic equivalent of the appreciation of Oncor’s LLC Units.  Each of the independent directors who purchased Class B Interests in January 2009 received one SAR for each Class B Interest purchased. In November 2012, in connection with the SARs Exercise Opportunity offered to management, our board of directors accepted for early exercise all outstanding SARs issued under the Director SARs Plan, pursuant to the provision of the Director SARs Plan that permits the board to accelerate the vesting and exercisability of SARs. At the time of such exercise, all outstanding SARs under the Director SARs Plan were vested. The November 2012 exercise of SARs entitled each participant in the Director SARs Plan, to: (1) an exercise payment, paid in 2012; and (2) the accrual of interest on all dividends declared to date with respect to the SARs, and no further dividend accruals. As a result, we began accruing interest on the following amounts of dividends: Mr. Dunning, $26,140, Mr. Estrada, $6,535; Mr. Ford, $26,140; and Mr. Wortham, $13,070.  These interest payments are payable in connection with payment of the dividends under the Director SARs Plan. The Director SARs Plan remains in effect solely with respect to the payment of the dividends and interest, which are payable upon the earliest to occur of death, disability, separation from service, unforeseeable emergency or a change in control, each as defined in Section 409A of the Internal Revenue Code.

 

 

 

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Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED EQUITY HOLDER MATTERS

 

Equity Compensation Plan Information

 

 

The following table presents information concerning the SARs Plan and Director Stock Appreciation Rights Plan (collectively, the Plans) at December 31, 2015.  In 2012, our board of directors accepted for early exercise all outstanding SARs issued under the Plans and effectively terminated further use of the Plans for SARs issuances.  These Plans remain in effect solely for the limited purpose of the timing of certain payments related to the early exercise of all outstanding SARs.  The early exercise was permitted by our board of directors pursuant to the provision of the SARs Plan that permits the board to accelerate the vesting and exercisability of SARs.  The early exercise of SARs entitled each participant in the SARs Plan to: (1) an exercise payment (Exercise Payment) equal to the number of SARs exercised multiplied by the difference between $14.54 and the base price of the SARs (as stated in the award letter for each SARs grant); and (2) the accrual of interest on all dividends declared to date with respect to the SARs, but no further dividend accruals.  Under both Plans, dividends that are paid in respect of Oncor membership interests while the SARs were outstanding were credited to the SARs holder’s account as if the SARs were units, payable upon the earliest to occur of death, disability, separation from service, unforeseeable emergency, a change in control, or the exercise of the SARs.  As part of their exercise agreements, participants in the Plans agreed that no further dividends would accrue, and that instead interest would accrue on all dividends declared to date, with both interest and dividend amounts becoming payable at the time dividends become payable pursuant to the terms of the Plans.  Additionally, certain executive officers agreed to defer payment of a portion of his/her Exercise Payment until the earlier of November 7, 2016 or the occurrence of an event triggering SAR exercisability pursuant to Section 5(c)(ii) of the SARs Plan.  These deferred payments totaled approximately $6 million in the aggregate.

 

There were no SARs outstanding under either Plan in 2015, and our board of directors has indicated that it does not intend to issue SARs under either Plan in the future.  For a discussion of the Plans and the 2012 exercise and settlement of all SARs, see “Executive Compensation — Compensation Discussion & Analysis — Compensation Elements — Long-Term Incentives — Stock Appreciation Rights Settlement,” “Executive Compensation – Director Compensation – Director SARs Plan Settlement,” and Note 10 to Financial Statements.

 

 

 

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Our executive officers, certain key employees and independent members of our board of directors were given the option to purchase Class B Interests of Investment LLC in 2008, pursuant to the 2008 Management Investment Opportunity offered under the Equity Interests Plan.  Each participant in the 2008 Management Investment Opportunity purchased Class B Interests at a price of $10.00 per unit, which was the same price per unit as the price per unit paid by Texas Transmission in connection with its November 2008 investment in Oncor.  In August 2011, Mr. Nye purchased Class B Interests in Investment LLC for $12.25 per unit (the fair market value of the Class B Interests, as determined by our board of directors based on a third party independent analysis) pursuant to the 2011 Management Investment Opportunity. Because the Class B Interests in each of the 2011 Management Investment Opportunity and the 2008 Management Investment Opportunity were purchased for fair market value, and it is expected that any future issuances under the Equity Interests Plan will be subject to the same purchase requirement, we do not consider the grants to be compensation.  Refer to “Directors, Executive Officers and Corporate Governance — Compensation Discussion and Analysis — Compensation Elements — Long Term Incentives — Equity Interests Plan and Management Investment Opportunity” for a more detailed discussion of the Equity Interests Plan and Management Investment Opportunity.

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Security Ownership of Equity Interests of Oncor of Certain Beneficial Owners and Management

 

The following table lists the number of limited liability company units (LLC Units) of Oncor beneficially owned by our directors and current executive officers and the holders of more than 5% of our LLC Units at February 15, 2016.    See Note 2 to Financial Statements for a discussion of the EFH Bankruptcy Proceedings and proposed changes in Oncor’s indirect ownership in connection with such proceedings.

 

The amounts and percentages of LLC Units beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

 

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Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Policies and Procedures Relating to Related Party Transactions

 

Our board of directors has adopted a written policy regarding related person transactions as part of our corporate governance guidelines.  Under this policy, a related person transaction shall be consummated or shall continue only if:

 

For purposes of this policy, the term “related person” means any related person pursuant to Item 404 of Regulation S-K of the Securities Act, except transactions with EFH Group Members (as defined below), which are subject to restrictions set forth in our Limited Liability Company Agreement.

A “related person transaction” is a transaction between us and a related person (including any transactions requiring disclosure under Item 404 of Regulation S-K under the Securities Act, if applicable), other than the types of transactions described below, which are deemed to be pre-approved by the Audit Committee:

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Our board of directors has determined that it is appropriate for its Audit Committee to review and approve or ratify related person transactions. In unusual circumstances, we may enter into related person transactions in advance of receiving approval, provided that such related person transactions are reviewed and ratified as soon as reasonably practicable by the Audit Committee of the board of directors.  If the Audit Committee determines not to ratify such transactions, we shall make all reasonable efforts to cancel or otherwise terminate such transactions.

 

The related person transactions described below under the heading “Related Party Transactions” were generally approved prior to the adoption of our related party transactions policy.  Except as otherwise indicated, these transactions were approved by our board of directors.

 

The related person transactions policy described above also does not apply to transactions with EFH Group Members (as defined below), which are subject to restrictions set forth in our Limited Liability Company Agreement.  Accordingly, the transactions with EFH Corp. or its subsidiaries were not approved by the board of directors or Audit Committee and were approved by our management.

 

Our Limited Liability Company Agreement requires certain separateness undertakings and provides that we will maintain an arm’s length relationship with EFH Corp., its successors, its subsidiaries and any individual or entity controlling or owning, directly or indirectly, more than 49% of our outstanding equity interests (collectively, the EFH Group Members), other than Oncor Holdings, Texas Transmission and each of their subsidiaries and only enter into transactions, other than certain specified transactions, with the EFH Group Members that are both (i) on a commercially reasonable basis, and (ii) if such transaction is material, approved by (a) a majority of the members of our board of directors, and (b) prior to a Trigger Event (as defined in our Limited Liability Company Agreement), the directors appointed by Texas Transmission, at least one of whom must be present and voting in order to approve the transaction.

 

 

Related Party Transactions

 

Transactions with EFH Corp. and its Subsidiaries

 

Except as otherwise indicated, transactions described below were between us and either EFH Corp. or its wholly-owned subsidiaries (other than the subsidiary described under “– Limited Partnership Interest”) and were approved by our management.

 

Transactions with TCEH

 

We record revenue from TCEH, principally for electricity delivery fees, which totaled $955 million, $971 million and $967 million for the years ended December 31, 2015, 2014 and 2013, respectively.  The fees are based on rates regulated by the PUCT that apply to all REPs.  These revenues included approximately $1 million for the year ended December 31, 2015 and $2 million for each of the years ended December 31, 2014 and 2013 pursuant to a transformer maintenance agreement with TCEH.  The balance sheets at December 31, 2015 and 2014 both reflect accounts receivable from affiliates totaling $118 million primarily consisting of trade receivables from TCEH related to these electricity delivery fees.

 

Under Texas regulatory provisions, the trust fund for decommissioning TCEH’s Comanche Peak nuclear generation facility is funded by a delivery fee surcharge we collect from REPs and remit monthly to TCEH.  Delivery fee surcharges totaled $17 million for the years  ended December 31, 2015 and 2014,  and $16 million for the year ended December 31, 2013.  Our sole obligation with regard to nuclear decommissioning is as the collection agent of funds charged to ratepayers for nuclear decommissioning activities.  If, at the time of decommissioning, actual decommissioning costs exceed available trust funds, we would not be obligated to pay any shortfalls but would be required to collect any rates approved by the PUCT to recover any additional decommissioning costs.  Further, if there were to be a surplus when decommissioning is complete, such surplus would be returned to ratepayers under terms prescribed by the PUCT.

 

Our PUCT-approved tariffs include requirements to assure adequate credit worthiness of any REP to support the REP’s obligation to collect transition bond-related charges on behalf of Bondco.  Under these tariffs, as a result of TCEH’s credit rating being below investment grade, TCEH is required to post collateral support in an amount equal to estimated

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transition charges over specified time periods.  Accordingly, at December 31, 2015 and 2014, TCEH had posted letters of credit in the amount of $6 million and $9 million, respectively for our benefit.

 

Services Provided by EFH Subsidiaries

 

EFH Corp. subsidiaries charge us for certain administrative services at cost.  These costs, which are reported in operation and maintenance expenses, totaled $17 million, $32 million and $30 million for the years ended December 31, 2015, 2014 and 2013, respectively, and include the administrative fees paid to EFH Corp. as discussed under “Health and Welfare Benefit Agreements” below.

 

Services Provided to EFH Subsidiaries

 

Subsidiaries of EFH Corp. paid us $939,000, $303,000 and $143,000 for the years ended December 31, 2015, 2014 and 2013, respectively, with respect to services we provided to EFH Corp. subsidiaries (excluding revenue, including electricity delivery fees, collected from TCEH).  These services included relocations, various studies and other services for the years ended December 31, 2015, 2014 and 2013.

 

Real Estate Transactions/Shared Facilities

 

We and EFH Corp. subsidiaries also bill each other for shared facilities.  Our payments to EFH Corp. and/or its subsidiaries with respect to shared facilities (including lease payments, utilities and telecommunications equipment) totaled  $4 million for each of the years ended December 31, 2015, 2014 and 2013.  Payments we received from EFH Corp. and/or its subsidiaries with respect to shared facilities totaled $2 million for each of the years ended December 31, 2015, 2014 and 2013.

 

Pension and OPEB Plans

 

We participate in and have liabilities under the Oncor Retirement Plan and the EFH Retirement Plan, both of which are qualified pension plans under Section 401(a) of the Internal Revenue Code of 1986, as amended (Code), and are subject to the provisions of ERISA.  Employees do not contribute to either plan.  EFH established the Oncor Retirement Plan as a spin-off of the EFH Retirement Plan, and Oncor assumed sponsorship of the Oncor Retirement Plan effective January 1, 2013 pursuant to a 2012 agreement.

 

Until 2014, we made certain OPEB payments to voluntary employee benefit trusts (“VEBAs”) established under the EFH health & welfare benefit plan for retiree life insurance benefits, union retiree health care benefits, and non-union retiree health care benefits. In March and April 2014, pursuant to agreements between Oncor and EFH, all of the assets attributable to former Oncor employees were transferred from the EFH VEBAs to corresponding VEBAs established by Oncor.

 

Until July 1, 2014, we also participated in the health care and life insurance benefit plan, the EFH OPEB Plan, offered by EFH Corp. to eligible employees of EFH Corp. and its subsidiaries and their eligible dependents upon the retirement of such employees from us.  See “Health and Welfare Benefit Agreements” below regarding the transfer of retirees from the EFH OPEB Plan to the Oncor OPEB Plan effective July 1, 2014).  In 2015, 2014 and 2013, we made cash contributions to the EFH Retirement Plan trust totaling $51 million, $64 million and $6 million, respectively, and to the EFH OPEB plan totaling zero, $7 million and $11 million, respectively.  These amounts represent our obligations for certain employees of EFH Corp.’s predecessor at the time of deregulation of the Texas electricity market.  PURA allows for our recovery of those costs and, as a result, in 2005 we entered into an agreement with EFH Corp.’s predecessor to assume those costs.

 

For additional information on pension and OPEB plans, see Note 10 to Financial Statements.

 

Health and Welfare Benefit Agreements

 

We previously participated in the Energy Future Holdings Health and Welfare Benefit Program, pursuant to which we provided employee benefits to our workforce.  In October 2013, we notified EFH Corp. of our intention to withdraw from the benefit program, effective June 30, 2014, and entered into an agreement with EFH Corp. pursuant to which we agreed to pay EFH Corp. (i) $1 million, to reimburse EFH Corp. for its increased costs of providing benefits under the

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program as a result of our withdrawal from the program, and (ii) an administrative fee of $100,000, to compensate EFH Corp. for the additional administrative work required of EFH Corp. in order to effectuate our withdrawal from the benefit program and transition to a new benefit program.  These amounts were paid in a lump sum on June 30, 2014, the effective date of our withdrawal from the EFH Corp. benefit program and are included in the administrative services costs paid to EFH Corp. as discussed above under “Services Provided by EFH Subsidiaries.”

 

In April 2014, in connection with our withdrawal from the EFH Corp. health and welfare program, we entered into an agreement with EFH Corp. pursuant to which we agreed to transfer to the new Oncor retiree benefit plan effective July 1, 2014 certain current and future retirees of Oncor and EFH Corp. whose employment included service with both Oncor (or a predecessor regulated electric business) and a non-regulated business of EFH Corp.    Pursuant to that agreement, EFH reimbursed us $179,000 and zero with respect to its portion of the liability for retiree benefits under the Oncor OPEB Plan for 2015 and the period from July 1, 2014 to December 31, 2014, respectively.  In addition, the agreement provides that EFH Corp. will pay us an annual administration fee of $60,000, payable on the first day of the applicable plan year, for our administrative services relating to the plan.  In addition, the agreement provides that effective January 1, 2016, the $60,000 annual fee shall be increased each year by the percentage increase in the Consumer Price Index for the preceding year.  These administration fees will be reported in “Services Provided to EFH Subsidiaries” above. 

 

Until 2015, Oncor employees participated in the EFH Thrift Plan, a defined contribution plan. Effective January 1, 2015, Oncor established the Oncor Thrift Plan as a spin off from the EFH Thrift Plan. Pursuant to an agreement between Oncor and EFH, all assets relating to the thrift plan accounts of Oncor participants were transferred from the EFH Thrift Plan to the Oncor Thrift Plan in January 2015.

 

Potential Exposure in the EFH Bankruptcy Proceedings

 

On the EFH Petition Date, EFH Corp. and the substantial majority of its direct and indirect subsidiaries that are members of the Texas Holdings Group, including EFIH, EFCH and TCEH, commenced proceedings under Chapter 11 of the US Bankruptcy Code.  The Oncor Ring-Fenced Entities are not parties to the EFH Bankruptcy Proceedings.  We believe the “ring-fencing” measures discussed in Note 1 to Financial Statements mitigate our potential exposure to the EFH Bankruptcy Proceedings. 

 

See Note 2 for a discussion of the potential impacts of the EFH Bankruptcy Proceedings on our financial statements.

 

Agreements with Oncor Members

 

Tax-Sharing Agreement

 

We are not a member of EFH Corp.’s consolidated tax group, but EFH Corp.’s consolidated federal income tax return includes EFH Corp.’s portion of our results due to EFH Corp.’s equity ownership in us.  Under the terms of a tax sharing agreement among us, Oncor Holdings, Texas Transmission, Investment LLC and EFH Corp., we are generally obligated to make payments to Texas Transmission, Investment LLC and EFH Corp., pro rata in accordance with their respective membership interests, in an aggregate amount that is substantially equal to the amount of federal income taxes that we would have been required to pay if we were filing our own corporate income tax return.  For periods prior to the tax sharing agreement (entered into in October 2007 and amended and restated in November 2008), we are responsible for our share of redetermined tax liability for the EFH Corp. consolidated tax group.  EFH Corp. also includes our results in its consolidated Texas margin tax payments, which are accounted for as income taxes and calculated as if we were filing our own return.  See discussion in Note 1 under “Income Taxes.”  Under the “in lieu of” tax concept, all in lieu of tax assets and tax liabilities represent amounts that will eventually be settled with our members.    In the unlikely event such amounts are not paid under the tax sharing agreement, it is probable that they would be reimbursed to rate payers.    

 

At December 31, 2015, we had receivables from members under the agreement related to federal income taxes totaling $136 million ($109 million due from EFH Corp. and $27 million due from Texas Transmission and Investment LLC) and a current Texas margin tax payable to EFH Corp. totaling $20 million.  At December 31, 2014, we had receivables from members under the agreement related to federal income taxes totaling $180 million ($144 million due from EFH Corp. and $36 million due from Texas Transmission and Investment LLC) and a current Texas margin tax payable to EFH Corp. totaling $24 million.

 

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We made in lieu of income tax payments totaling $159 million (including $27 million in federal income tax-related payments to members other than EFH Corp.) in the year ended December 31, 2015.  We made in lieu of income tax payments totaling $291 million (including $54 million in federal income tax-related payments to members other than EFH Corp.) in the year ended December 31, 2014. Also,  we made in lieu of income tax payments totaling $101 million (including $11 million in federal income tax-related payments to members other than EFH Corp.) in the year ended December 31, 2013.  

 

Pursuant to the terms of Investment LLC’s limited liability company agreement, Investment LLC dividends cash it receives from us to the holders of Class B Interests pro rata in accordance with their Class B Interests.  See “Executive Compensation – Compensation Discussion and Analysis – Compensation Elements – Long-Term Incentives – Equity Interests Plan and Management Investment Opportunity” for a discussion of investments in Investment LLC by certain of our executive officers and “Executive Compensation - Director Compensation – Purchases of Class B Interests” for a discussion of investments in Investment LLC by certain of our independent directors.  The amounts distributed by Investment LLC to the holders of Class B Interests consist of both (1) Investment LLC’s pro rata share of any dividends we pay to members with respect to our earnings, and (2) Investment LLC’s pro rata share of any amounts we pay to members pursuant to our obligations under the tax sharing agreement.

 

Second Amended and Restated Limited Liability Company Agreement of Oncor

 

The Second Amended and Restated Limited Liability Company Agreement of Oncor (as amended, Limited Liability Company Agreement), among other things, sets out the members’ respective governance rights in respect of their ownership interests in Oncor. Among other things, the Limited Liability Company Agreement provides for the management of Oncor by a board of directors consisting of 12 members, including at least seven Independent Directors (as defined in the Limited Liability Company Agreement), two directors designated directly or indirectly by Texas Transmission (subject to certain conditions), two directors designated indirectly by EFH Corp. and one director that is also an officer of Oncor. Texas Transmission also has the right to designate one non-voting observer to the board of directors, who is entitled to attend all meetings of the board of directors (subject to certain exceptions) and receive copies of all notices and materials provided to the board of directors.

 

The Limited Liability Company Agreement prohibits Oncor and its subsidiaries from taking certain material actions outside the ordinary course of business without prior approvals by the members, some or all of the Independent Directors and/or the directors designated by one or more of the members.  Additionally, the Limited Liability Company Agreement contains provisions regulating capital accounts of members, allocations of profits and losses and tax allocation and withholding.

 

The Limited Liability Company Agreement also requires that any changes to Oncor’s procedures and limitations on declaring and paying distributions be approved by (i) a majority of the Independent Directors, (ii) all of the EFH Corp. directors and (iii) the Texas Transmission director(s) present and voting, provided that at least one Texas Transmission director must be present and voting in order to approve such matter. In addition, any annual budget with an aggregate amount of capital and operating and maintenance expenditures that are more than 10% less than the capital and operating and maintenance expenditures in the annual budget for the immediately prior fiscal year must be approved by (a) a majority of the Independent Directors and (b) the Texas Transmission director(s) present and voting, provided that at least one Texas Transmission director must be present and voting in order to approve such action. Also, any acquisition of or investment in any third party which involves the purchase of or investment in assets located outside the State of Texas for consideration in an amount greater than $1.5 billion must be approved by (a) a majority of the Independent Directors and (b) the Texas Transmission director(s) present and voting, provided that at least one Texas Transmission director must be present and voting in order to approve such action.

 

Registration Rights Agreement

 

In November 2008, we entered into a registration rights agreement (Registration Rights Agreement) by and among us, Oncor Holdings, Texas Transmission and EFH Corp.  The Registration Rights Agreement grants customary registration rights to certain of our members. Subject to certain limitations set forth in the Registration Rights Agreement, these rights include, without limitation, the following: (i) the right of Oncor Holdings at any time, and after ten years from the date of the Registration Rights Agreement, the right of Texas Transmission, to demand that we register a specified amount of membership interests in accordance with the Securities Act of 1933, as amended; (ii) the right of both Oncor Holdings and Texas Transmission to demand registration of a specified amount of membership interests following an initial public

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offering; and (iii) the right of all members that are parties to the Registration Rights Agreement to have their membership interests registered if we propose to file a registration statement relating to an offering of membership interests (with certain exceptions).

 

Subject to certain exceptions, whenever we are required to effect the registration of any membership interests pursuant to the Registration Rights Agreement, we have agreed to use our best efforts to cause the applicable registration statement to become effective, and to keep each such registration statement effective until the earlier of (a) at least 180 days (or two years for a shelf registration statement) or (b) the time at which all securities registered under such registration statement have been sold.

 

Investor Rights Agreement

 

The investor rights agreement dated as of November 5, 2008, by and among Oncor, Oncor Holdings, Texas Transmission, EFH Corp. and any other persons that subsequently become a party thereto (Investor Rights Agreement) governs certain rights of certain members of Oncor and EFH Corp. arising out of their direct or indirect ownership of Oncor membership interests, including, without limitation, transfers of Oncor membership interests and restrictions thereon.  Texas Transmission may transfer its Oncor membership interests under a registration statement or pursuant to applicable securities laws. The Investor Rights Agreement also grants Texas Transmission certain “tag-along” rights in relation to certain sales of Oncor membership interests by Oncor Holdings. Subject to certain conditions, these “tag-along” rights allow Texas Transmission to sell a pro-rata portion of its Oncor membership interests in the event of a sale of Oncor membership interests by Oncor Holdings on the same terms as Oncor Holdings would receive for its Oncor membership interests. The agreement further provides that under certain offerings of equity securities occurring before an initial public offering of Oncor, Texas Transmission and Oncor Holdings will receive preemptive rights to purchase their pro-rata share of the equity securities to be sold pursuant to such offerings. The Investor Rights Agreement also provides EFH Corp. with a right of first refusal to purchase any Oncor membership interests to be sold in a permitted sale by Texas Transmission or its permitted transferees.

 

Additionally, Texas Holdings, EFH Corp., certain of EFH Corp.’s subsidiaries and Oncor Holdings have certain “drag-along” rights in relation to offers from third-parties to purchase their directly or indirectly owned membership interests in Oncor, where the resulting sale would constitute a change of control of Oncor. These “drag-along” rights compel Texas Transmission and all other members of Oncor to sell or otherwise transfer their membership interests in Oncor on substantially the same terms as Texas Holdings, EFH Corp., the EFH Corp. subsidiary or Oncor Holdings (as applicable). Pursuant to the Investor Rights Agreement, all members of Oncor that have entered into such agreement must cooperate with Oncor in connection with an initial public offering of Oncor.

 

Transactions with the Sponsor Group

 

Affiliates of the Sponsor Group have, and from time-to-time may in the future (1) sell, acquire or participate in the offerings of our debt or debt securities in open market transactions or through loan syndications, and (2) perform various financial advisory, dealer, commercial banking and investment banking services for us and certain of our affiliates for which they have received or will receive customary fees and expenses. 

 

Transactions with Portfolio Companies of Certain of our Beneficial Owners

 

The beneficial owners of the Sponsor Group and Texas Transmission include private equity and hedge funds who make equity investments in multiple companies (Portfolio Companies) in the ordinary course of their business.  We have in the past entered into, and may continue to enter into, transactions with Portfolio Companies or their affiliates, which may result in revenues to members of the Sponsor Group or the beneficial owners of Texas Transmission in excess of $120,000 annually.  Effective March 31, 2015, KKR, a member of the Sponsor Group, acquired 16.6% of the beneficial ownership of Willbros Group, Inc. We paid subsidiaries of Willbros Group, Inc. approximately $174.16 million in 2015 for transmission and distribution construction services.  We are also party to an agreement with a subsidiary of Northgate Information Solutions for human resources services and software solutions, and paid the subsidiary $3,141,784, $1,619,690, and $2,376,272 in 2015, 2014 and 2013, respectively.  The equity of Northgate Information Solutions is 90% beneficially owned by KKR. These transactions with subsidiaries of Willbros Group, Inc. and Northgate Information Solutions were ratified by our Audit Committee in accordance with our related party transactions policy.

 

 

SARs Exercise Agreements

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In November 2012, our board of directors accepted for early exercise all outstanding SARs issued under the SARs Plan and the Director SARs Plan. The early exercise was completed pursuant to the provision of the plans that permits the board to accelerate the vesting and exercisability of SARs.  Each of our executive officers and certain of our independent directors (currently Messrs. Dunning, Estrada and Wortham) were participants in the SARs early exercise in 2012. In connection with the early exercise, each participant in the plans entered into an exercise agreement that entitled each participant to: (1) an exercise payment (Exercise Payment) equal to the number of SARs exercised multiplied by the difference between $14.54 and the base price of the SARs (as stated in the award letter for each SARs grant); and (2) the accrual of interest on all dividends declared to date with respect to the SARs, but no further dividend accruals.  As a result of the early exercise, in 2012 we paid an aggregate of approximately $64 million related to Exercise Payments ($57 million charged to expense), $35 million of which was attributable to our executive officers and $250,000 of which was attributable to independent directors that participated in the Director SARs Plan.  We also began accruing interest on approximately $18 million in aggregate dividends. The dividends and interest are payable when dividends would become payable under the SARs Plan, which is generally upon a participant’s death, disability, separation from service, unforeseeable emergency, or a change in control, each as defined by section 409A of the Internal Revenue Code.    In the years ended December 31, 2015, 2014 and 2013, we recognized $713,000,  $731,000 and $1,807,000, respectively, in accretion and interest related to dividends with respect to executive officers’ dividend accounts, and $3,000 for each of those years with respect to Director SARs Plan accounts.

 

Additionally, certain executive officers, including all of our current executive officers, agreed in their exercise agreements to defer payment of a portion of his/her Exercise Payment until the earlier of November 7, 2016 or the occurrence of an event triggering SAR exercisability pursuant to Section 5(c)(ii) of the SARs Plan.  These deferred payments totaled approximately $6 million in the aggregate for 2012 executive officers.  In July 2014, the Organization & Compensation Committee of our board of directors approved the winding up of the trust containing these deferred payments and the distribution of amounts held in the trust to the participants, plus each officer’s proportionate share of the trust’s aggregate investment earnings.  The trust was terminated, and these amounts were distributed, in August 2014.

 

Management Investment Opportunity

Each executive officer participating in the Management Investment Opportunity entered into a management stockholder’s agreement and sale participation agreement with us. Each director that purchased Class B Interests of Investment LLC in 2009 entered into a director stockholder’s agreement and a sale participation agreement with us. Currently, each of our executive officers is a party to a management stockholder’s agreement and a sale participation agreement, and each of Messrs. Dunning, Estrada and Wortham is a party to a director stockholder’s agreement and a sale participation agreement.  The terms of these agreements, which were approved by the O&C Committee, are detailed below.

 

Management Stockholder’s Agreement

 

The management stockholder’s agreement contains restrictions on the participant’s ability to transfer any Class B Interests.  Except in certain limited circumstances, any Oncor equity interests or Class B Interests beneficially owned by the participant will be non-transferable prior to the later of (1) October 10, 2012 or (2) with respect to certain interests, a “qualified public offering” (as defined in the management stockholder’s agreement).  In addition, the management stockholder’s agreement gives the Company certain rights of first refusal in the event the participant attempts to sell any Oncor equity interests or Class B Interests prior to the earlier to occur of (1) a “change in control” (as defined in the management stockholder’s agreement) or (2) consummation of a qualified public offering of Oncor.

 

In addition, the management stockholder’s agreement gives us certain rights to repurchase the participant’s Class B Interests if we terminate the participant’s employment for cause (as defined in the management stockholder’s agreement) or if the participant violates certain of his or her non-compete obligations, at a price equal to the lesser of the fair market value of the Class B Interests or the purchase price paid by the participant for the Class B Interests.  The management stockholder’s agreement also gives the participant or the participant’s estate, as applicable, certain rights to compel our company to repurchase its Oncor equity interests and Class B Interests upon the death or disability of the participant for a price equal to the fair market value of the Oncor equity interests and Class B Interests.  Generally, these rights will terminate on the earlier of (a) a change in control of Oncor or (b) a public offering of Oncor or Investment LLC equity.

 

Furthermore, the management stockholder’s agreement provides that, subject to certain conditions, the participant will receive certain piggy-back rights to sell its Oncor equity interests and Class B Interests to Oncor if there is a proposed sale by the Sponsor Group or Texas Holdings of (1) the common stock of EFH Corp.; or (2) a sale of 50% or more of the

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outstanding partnership interests of Texas Holdings. Subject to certain conditions, the participant will also receive these rights if Oncor Holdings proposes to sell any of its Oncor equity interests.  Additionally, the participant will be subject to certain drag-along rights in the event (a) Texas Holdings or a member of the Sponsor Group proposes to sell a number of shares of common stock of EFH Corp. or limited partnership interests of Texas Holdings equal to 50% or more of the outstanding shares of common stock of EFH Corp. or limited partnership interests of Texas Holdings, as applicable; or (b) Oncor Holdings proposes to sell 50% or more of the outstanding Oncor equity interests. Generally, these rights will terminate on the earlier of (a) a change in control of Oncor or (b) a public offering of Oncor or Investment LLC equity.

 

The management stockholder’s agreement also contains certain non-compete provisions, including a restriction on the participant from engaging in a competing business during the term of the participant’s employment with us and for 12 months following his or her termination of employment with us.

 

Director Stockholder’s Agreement

 

The director stockholder’s agreement contains restrictions on the participant’s ability to transfer any Class B Interests. Until the earlier of a “qualified public offering” (as defined in the director stockholder’s agreement), five years from the date of the agreement or the occurrence of a “change of control” (as defined in the director stockholder’s agreement) in the event a director proposes to transfer any Oncor equity interests or Class B Interests, except in certain limited circumstances, such director must first offer such equity interests or Class B Interests to us or Investment LLC, as applicable.

 

 

Furthermore, the director stockholder’s agreement provides that, subject to certain conditions, the participant will receive certain piggy-back rights to sell its Oncor equity interests and Class B Interests to Oncor if there is a proposed sale by the Sponsor Group or Texas Holdings of (1) the common stock of EFH Corp.; or (2) 50% or more of the outstanding partnership interests of Texas Holdings.  Subject to certain conditions, the participant will also receive these rights if Oncor Holdings proposes to sell any of its Oncor equity interests.  Additionally, the participant will be subject to certain drag-along rights in the event (a) Texas Holdings or a member of the Sponsor Group proposes to sell a number of shares of common stock of EFH Corp. or limited partnership interests of Texas Holdings equal to 50% or more of the outstanding shares of common stock of EFH Corp. or limited partnership interests of Texas Holdings, as applicable; or (b) Oncor Holdings proposes to sell 50% or more of the outstanding Oncor equity interests. Generally, the rights described in this paragraph will terminate on the earlier of a change in control of Oncor or the later of (i) five years from the date of the agreement,  or (ii) a public offering of Oncor or Investment LLC equity.

 

Sale Participation Agreements

 

The sale participation agreements entered into by members of our management and board of directors in connection with their investments in Investment LLC give us, Oncor Holdings and certain of Oncor Holdings’ investors drag-along rights in the event Oncor, Oncor Holdings or certain of Oncor Holdings’ investors engage in corporate transactions in which they sell a direct or indirect equity interest in Oncor.  In addition, the sale participation agreement gives the participant tag-along rights in the event Oncor, Oncor Holdings or certain of Oncor Holdings’ investors engage in corporate transactions in which they sell a direct or indirect equity interest in Oncor.  The form of sale participation agreement entered into by management is essentially identical to the form of sale participation agreement entered into by directors. In each case, the rights described in this paragraph will terminate on the earlier of (1) a change in control of Oncor or (2) certain public offerings of Oncor’s equity interests.

 

Director Independence

 

Our Limited Liability Company Agreement provides that seven members of our board of directors must be deemed independent. For a director to be deemed independent, our board of directors must affirmatively determine that such director does not have a material relationship with Oncor or EFH Corp. or their respective successors and subsidiaries, any entity that controls or owns directly or indirectly more than 49% of the equity interests in Oncor, and certain other specified entities that directly or indirectly own securities of Oncor (collectively, the Non-Ring Fenced Entities).  In addition, under our Limited Liability Company Agreement, to be deemed independent, a director must also meet the independence standards in Section 303A of the New York Stock Exchange Manual in all material respects.  Our Limited Liability Company Agreement further provides that a director that otherwise meets these requirements will not be precluded from qualifying as independent if such director otherwise meets such criteria but (i) served as a director or shareholder of EFH Corp. prior to the October 2007 merger of Texas Energy Future Merger Sub Corp. with and into EFH

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Corp., (ii) indirectly or beneficially owns equity interests through a mutual fund or similar investment vehicle with respect to which the director does not have discretion or control over the investments held by such investment vehicle, (iii) directly or indirectly holds an amount of legal or beneficial stock in any of the Non-Ring Fenced Entities that is de minimis and which the other independent directors determine would not reasonably be expected to influence the judgment of such director in determining the interests of Oncor or its members, or (iv) is a ratepayer, supplier, creditor or independent contractor of, or a person who received any benefit from or provided any services to, Oncor, Oncor Holdings or any of the Non-Ring Fenced Entities, if the other independent directors determine that such relationship would not reasonably be expected to influence the judgment of the director in determining the interests of Oncor or its members.

 

In addition, our Limited Liability Company Agreement requires that two of the seven independent members of our board of directors also meet additional independence qualifications.  These directors, known as special independent directors, may not, during their service as a director or at any time in the five years preceding their appointment, be (i) a direct or indirect legal or beneficial owner in Oncor, Oncor Holdings or any of the Non-Ring Fenced Entities, (ii) a creditor; supplier; employee; officer; director; family member of any officer, employee or director; manager or contractor of Oncor, Oncor Holdings or any of the Non-Ring Fenced Entities, or (iii) a person who controls (directly, indirectly or otherwise) Oncor, Oncor Holdings or any of the Non-Ring Fenced Entities or any creditor, supplier, employee, officer, director, manager or contractor of Oncor, Oncor Holdings or any of the Non-Ring Fenced Entities.  However, a director will not be precluded from being deemed a special independent director if such director otherwise meets the requirements but (i) indirectly or beneficially owns stock through a mutual fund or similar diversified investment vehicle (other than investment vehicles affiliated with KKR, TPG or Goldman Sachs & Co.), or (ii) directly or indirectly legally or beneficially owns interests in a Non-Ring Fenced Entity, if such ownership does not exceed one percent of the net worth of such director.  A special independent director may also serve as an independent director of Oncor Holdings or any of Oncor’s subsidiaries.

 

Our board of directors has determined that Messrs. Adams, Dunning, Estrada, Gary, Hill, Mack and Wortham are independent directors under the standards in Section 303A of the New York Stock Exchange Manual and the other standards in our Limited Liability Company Agreement.  Further, our board of directors has determined that each of Messrs. Gary and Hill qualifies as a special independent director under the standards set forth in our Limited Liability Company Agreement.

 

Mr. Adams is our Chairman of the Board, and presides at all meetings of our board of directors. Mr. Adams was appointed Chairman of the Board effective July 2015. Mr. Dunning is the Lead Independent Director of our board of directors and has served in such role since July 2010. The Lead Independent Director presides at meetings of the independent directors, and performs such duties and responsibilities as may be specified by the board. 

 

Our board of directors has designated an Audit Committee, Nominating and Governance Committee and Organization and Compensation Committee to exercise certain powers and authorities of the board of the directors.  Members of these committees are not required by our Limited Liability Company Agreement or board of directors to meet any independence standards.  Mr. Zucchet has served on the Organization and Compensation Committee since May 2010, and Mr. Liaw served on such committee from its inception until his resignation from our board of directors on January 22, 2015.  Mr. Ferguson, originally appointed to the Nominating and Governance Committee effective February 2011, was removed from such committee and appointed to the Organization and Compensation Committee effective July 29, 2015.  Mr. Zucchet was also appointed to the Nominating and Governance Committee effective February  2011.  Mr. Evenden, who was appointed by Texas Transmission to our board of directors in October 2014, was appointed to the Audit Committee effective October  2014.  Mr. Youngblood, who was appointed to our board of directors by Oncor Holdings at the direction of EFIH in March 2015, was appointed to the Audit Committee effective July 29, 2015.  None of Messrs. Evenden, Ferguson, Liaw, Youngblood or Zucchet qualifies as an independent director for purposes of our Limited Liability Company Agreement.

 

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Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Deloitte & Touche LLP is our independent registered public accounting firm.

 

In 2008, our Audit Committee adopted a policy governing the engagement of our independent registered public accounting firm.  The policy provides that in addition to the audit of the financial statements, related quarterly reviews and other audit services, and providing services necessary to complete SEC filings, our independent auditor may be engaged to provide non-audit services as described herein.  Prior to engagement, all services to be rendered by the independent auditor must be authorized by our Audit Committee in accordance with pre-approval procedures which are defined in the policy.  The pre-approval procedures require:

 

 

 

Our Audit Committee may also approve certain ongoing non-audit services not previously approved in the limited circumstances provided for in the SEC rules.  All services performed in 2015 by Deloitte & Touche LLP, the member firms of Deloitte & Touche Tohmatsu and their respective affiliates (Deloitte & Touche) were pre-approved by our Audit Committee.

 

The policy defines those non-audit services which our independent auditor may also be engaged to provide as follows:

 

 

 

 

The policy prohibits us from engaging our independent auditor to provide:

 

 

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In addition, the policy prohibits our independent auditor from providing tax or financial planning advice to any of our officers.

 

The policy also contains the following standard of conduct for our independent auditor related to staffing and conducting its annual audit:

 

 

Compliance with our Audit Committee’s policy relating to the engagement of Deloitte & Touche is monitored on behalf of our Audit Committee by our chief internal audit executive.  Reports from Deloitte & Touche and the chief internal audit executive describing the services provided by Deloitte & Touche and fees for such services are provided to our Audit Committee no less often than quarterly.

For the years ended December 31, 2015 and 2014, fees billed (in US dollars) to us by Deloitte & Touche were as follows:

 

 

 

 

 

 

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PART IV

 

Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 

 

The consolidated financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.

 

(b)Exhibits:

 

*    Incorporated herein by reference.

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Oncor Electric Delivery Company LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Oncor Electric Delivery Company LLC and in the capacities and on the date indicated.

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Supplemental Information to be Furnished with Reports Filed

Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered

Securities Pursuant to Section 12 of the Act

 

 

No annual report, proxy statement, form of proxy or other proxy soliciting material has been sent to security holders of Oncor Electric Delivery Company LLC during the period covered by this Annual Report on Form 10-K for the fiscal year ended December 31, 2015. 

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